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

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

Tavis McCourt - Morgan Keegan

Richard Kramer - ARIT

T. Michael Walkley - Piper Jaffray

Jim Suva - Citigroup

Edward Snyder - Charter Equity Research

James Faucette - Pacific Crest Securities

Amir Rozwadowski - Barclays Capital

Philip Cusick - Macquarie

Jonathan Goldberg - Deutsche Bank

Paul Coster - J.P. Morgan

Maynard Um - UBS

Simona Jankowksi - Goldman Sachs

Trip Chowdry - Global Equities Research

Matt Thornton - ABN Securities

Tim Long - BMO Capital Markets

Mike Abramsky - RBC Capital Markets

Kevin Manning - BMO Capital Markets

Gerard Helarin - Town Hall Research

Ilya Grozovsky - Morgan Joseph

Palm, Inc. (PALM) F1Q10 Earnings Call September 17, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Palm Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Teri Klein, Vice President of Investor Relations. Please proceed.

Teri Klein

Thank you. I would like to welcome you to Palm's fiscal 2010 first quarter financial results conference call. On the call today are John Rubinstein, Palm's Chairman and CEO; and Doug Jefferies, our Chief Financial Officer. Please note that today’s call will not be available for replay. We will however be posting scripted remarks on Palm's IR website.

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 revenue and other 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 first quarter of fiscal year 2010.

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 earnings 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 Palm's IR website. We encourage listeners to review these items.

I have one final item today. Due to restrictions under Securities laws, we will not be discussing our planned public offering and will not be taking questions on that topic. I want to reiterate that if you in any way reference the deal or ask about anything related to the offering, we will be unable to respond to your questions. Thank you and now I would like to turn the call over to John.

Jonathan J. Rubinstein

Hi, everyone and thanks for joining us on our Q1 earnings call. The solid results we posted today support our great confidence in Palm's future and our ability to take advantage of the growing number of opportunities ahead. We are moving forward with a significantly transformed team, focused on the strategic goals I highlighted last quarter -- one, designing a family of Palm Web OS products that excite users, deliver value to their lives, and demonstrate the benefits of the Palm Web OS experience; two, establishing Palm Web OS as a world-class development platform; three, building greater awareness of the Palm brand and connecting it to our products and experiences; and four, ensuring that outstanding execution underscores everything we do.

We believe our success in these areas should translate into long-term sustainable growth for Palm, enabling us to launch more products with more carriers and expand our reach in new and existing markets.

Q1 was a landmark quarter for us, as we began to showcase Palm's vision for developing integrated hardware, software, and services in a defining way. We successfully launched a technological trifecta that was years in the making. We introduced our new Palm Web OS operating system, put in place a new cloud services infrastructure, and brought to market the Palm Pre, the first in what we expect to be a long line of products that deliver the compelling Web OS experience to customers around the world.

In addition to the recent announcement of Palm Pixie, our second product in the growing family of Web OS devices, we also announced that effective last week, Sprint made the Palm Pre available for $149.99 after all applicable rebates. These two initiatives should help make the Web OS experience more accessible to customers, increase distribution, and provide choices for people who want to integrate the Palm experience into their lives.

Beyond Sprint, we successfully launched the Palm Pre with Bell Mobility in Canada and we are actively working with Telefonica in Europe to establish our product positioning, increased brand awareness, and generate demand in advance of the Pre’s European debut this fall.

We are receiving excellent reviews from customers who bought the Palm Pre for personal use. The Pre is also being adopted as a popular business device. Deployments of the Pre within large companies are on the rise and just recently, Gartner placed the Palm Pre in the appliance level category, signifying that Palm Web OS and the Palm Pre are suitable for enterprise use.

We think this classification, coupled with the over-the-air enhancements we’ve made to our Microsoft Exchange security policies, should position us for growth in the business segment.

The versatility of Palm Web OS for both business and personal use is just one of the reasons it sits at the center of our growing family of products and is the cornerstone of Palm's future. Given the importance of Web OS to our overall strategy, we’ve made the decision to dedicate all future development resources to the evolution of Web OS, which means that going forward, our roadmap will include only Palm Web OS based devices.

Excitement is already building for the second in our Web OS family of products, the Palm Pixie, which I mentioned earlier, slated to be available from Sprint for the holiday season.

Pixie takes Web OS and repackages it for customers who want a device that’s compact, customizable, and more affordable. Consumers have a preference for form factor and price and with the Palm Pixie, we will offer two different entry points into the same great Web OS experience.

Sprint has been a great partner and we are pleased to team with them again for the introduction of the Palm Pixie. At the same time, we are looking forward to announcing equally strong strategic relationships with additional carriers. We are already under contract with new partners to bring our Palm Web OS products to more customers in new and existing markets this fiscal year.

Launching more products with more carriers is key to our growth strategy; inspiring long-term loyalty to Palm products is just as important. For this reason, we continued to enhance our software platform with regular over-the-air updates and we are putting significant resources towards creating a compelling third-party application offering.

Our developer program is one of our highest priorities. We have had tens of thousands of SDK downloads since making the software broadly available in July and our beta app catalog is expanding every week with quality offerings from our early access partners. We are working with a spectrum of developers, including well-known companies such as Electronic Arts, Open Table, and Yelp, as well as younger companies and individuals.

The response from the development community to Web OS has been overwhelmingly positive. Feedback we’ve gotten confirms that Web OS lowers the barrier to entry for developers, provides a development cycle that is easy and fast, and offers unique capabilities, like multi-tasking, Palm synergy, universal search, notifications, and a live gesture area that developers can creatively integrate into their apps.

The introduction of Pixie has also helped us demonstrate the scalability of Web OS and how applications can easily span our family of Web OS products. As an example, we invited Accelerato, the developer of the popular mobile air hockey game, to build a Web OS app for demonstration at the Pixie announcement. Accelerato’s application was built in weeks, not months. It runs on both Pre and Pixie and the developers never required access to an actual Pixie device during their development period. Accelerato is just one of many partners already taking advantage of the speed, efficiency, and scalable environment offered by Web OS. We will be unveiling our full developer program this fall, including a commerce solution, support for application distribution, and an opening of the catalog to public submissions.

We are pushing forward on every front to make sure our products meet customers’ needs. In conjunction with this, we need to ensure that Palm's differentiation is effectively communicated to the marketplace. With this in mind, we have reorganized Palm's marketing organization into two separate functions, product marketing and brand design, and added two talented new executives to lead these important areas; Kay Mitic, who led some of Yahoo!’s most popular global businesses, joined us in June as Head of Product Marketing, where she oversees all hardware and software product management, as well as developer relations. And in July, Jeff Zwerner, the founder and principal of the highly acclaimed brand strategy and design agency, Factor Design, joined the team. Jeff and his teams are working hard to strengthen Palm's brand, increase awareness, and clarify our product messages.

Together, Jeff and Katie create a complementary and dynamic marketing team which now completes Palm's senior leadership staff. Over the past several months, Palm has made consistent gains on nearly all key brand health measures. As we grow our family of Web OS products and improve the clarity of our communications, we expect this trend to continue.

The results we posted today are a good initial indicator of Palm's potential. With the launch of the Palm Pre and Web OS, we accomplished one of our most critical transformation milestones. Now we are turning our sites towards growth.

We still have work to do to fully realize the future we envision and we will face some near-term pressures until we transition to a more diversified carrier base and expand our family of Web OS products. But we are confident we are on the path to success.

Now I will turn the call over to Doug to give you more details on our Q1 results.

Douglas C. Jeffries

Thanks, John. As John highlighted, we are making good progress toward our long-term goals. I would like to review our August quarter results, which reflect the impact of these efforts and the successful launch of our Palm Pre.

As a reminder, my discussion today will be based on non-GAAP adjusted information, which excludes the impact of subscription accounting, stock-based compensation, mark-to-market adjustments related to our Series C derivatives, and other items which are detailed in the release.

As those of you who have followed the company know, quarters that include major product launches have historically reflected large revenue gains. On a non-GAAP basis, our first quarter of 2010 was no exception. We saw strong sales from the successful launches of the Palm Pre at Sprint early in the quarter and Bell Mobility near quarter end. Non-GAAP adjusted revenues for Q1 totaled $360.7 million, a more than three-fold increase over Q4 of ’09. We shipped a total of 823,000 smartphone units in Q1 versus 351,000 units in Q4. Smartphone sell-through for our August quarter came in at 810,000 units versus 460,000 units in our May quarter. Our non-GAAP adjusted gross margin for Q1 came in at 27.9%, a 1.1 percentage point increase versus our adjusted gross margin of 26.8% in Q4. The sequential margin improvement was a result of the shift in our product mix to Palm Pre.

Our primary focus at this point is growing our market share and rapidly expanding our installed base of Web OS devices. We continue to believe, however, that over time as we achieve larger production volumes and establish a diversified base of carrier partners, we have the opportunity to deliver non-GAAP adjusted gross margins of over 30%.

Non-GAAP adjusted operating expense, which excludes stock option expense, restructuring charges, and amortization, came in at $110 million for the quarter. As expected, our sales and marketing expense increased by a little over $22 million versus last quarter due to increased marketing for the Palm Pre launch, including our network TV and online ad campaign which kicked off in June.

We will continue to invest in sales and marketing throughout the year. In particular, our November quarter marketing spend will increase versus Q1 as we support two new launches, the Palm Pre with Telefonica and Palm Pixie with Sprint, while continuing our current promotional efforts.

We also increased our R&D spending versus last quarter, reflecting our commitment to a new product development. As the fiscal year unfolds, you will see us continue to make investments to strengthen our innovative capabilities, expand our product portfolio, and continue to evolve Palm Web OS.

Our non-GAAP adjusted net loss for the August quarter was $13.6 million, or $0.10 per share. This compares to a non-GAAP adjusted net loss in the May quarter of $53.4 million, or $0.40 per share.

Turning to the balance sheet now, our accounts receivable balance increased to $76.6 million versus $66.5 million at the end of Q4, due to stronger sales in the quarter, offset in part by improved collections. With the launch of Pre, our inventory levels in Q1 increased to $27.8 million from $19.7 million in the May quarter. ESI improved from 21 days in Q4 of ’09 to 10 days in Q1 of 2010, reflecting efficiencies in the Pre supply chain and expedited delivery schedules.

We ended Q1 with a strong cash balance. Our cash, cash equivalents, and short-term investments balance at the end of the quarter was $211.8 million, and cash used in operations was $45.1 million, down from $72.4 million in Q4.

At this point, I would like to spend some time talking about our outlook for the remainder of the year. While we don’t intend to provide specific guidance on a regular basis, we wanted to spend some time with you today discussing some of the business dynamics we see unfolding in Q2 and for the full fiscal year.

As I noted earlier, and as our Q1 results show, our performance at our current scale is particularly sensitive to the size and timing of product launches. The strong revenue improvement we saw in the first quarter on a non-GAAP basis reflects our major product launch with Sprint early in the quarter and our launch with Bell Mobility toward quarter end.

Looking ahead, we expect the timing and size of product launches planned for the second quarter, coupled with lower anticipated demand for our legacy products, to yield Q2 non-GAAP revenues below the results we posted in Q1. On a non-GAAP adjusted basis, we anticipate revenues for our second fiscal quarter to be between $240 million and $270 million. Beyond Q2, our performance for the rest of the fiscal year should significantly strengthen. We expect to launch products with additional carriers in the second half of fiscal 2010 that, together with the continuing sales from products launched in the first half of the year, is expected to yield non-GAAP adjusted revenues for fiscal year 2010 of between $1.6 billion to $1.8 billion.

As we noted on our last conference call, we expect to use cash during the first half of fiscal year 2010 as we continue to invest in expansion and product development. As our revenues grow during the year, we see the potential of becoming cash flow positive and turning the corner into non-GAAP profitability on a quarterly basis before we exit the fiscal year.

We are pleased with our progress to date and believe our first quarter results indicate that our business strategy with its emphasis on customer focused innovation and commitment to high execution standards, is gaining traction. As we emerge from our transformation, we will continue to focus on those initiatives that we believe will create sustained value. We are extremely excited about the opportunities that lie ahead.

With that, let me turn the call over to the Operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tavis McCourt with Morgan Keegan.

Tavis McCourt - Morgan Keegan

Thanks for taking my question. My question is really on kind of product strategy. I think throughout the transition you guys have talked about having kind of two form factors or two price points out there at $199 and $99 and obviously the Pre has been dropped to $149 and I was wondering if you still had that philosophy or would you look to put even more form factors into the market? Has anything changed in the strategy there?

Jonathan J. Rubinstein

Well, first of all, we’ve never really talked about price points. We have talked about families of products and yes, I am a big believe in families of products and we will continue to evolve our product line into the future and have a variety of products that support Web OS.

Teri Klein

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

Operator

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

Richard Kramer - ARIT

Thanks very much. Just very briefly, could you let us know, is Palm being asked by carriers to provide above the line marketing support? And are you also being asked by carriers to customize the Palm devices for their own UIs and platforms?

Jonathan J. Rubinstein

We don’t really talk about the actual agreements with the carriers. You know, as far as the platform itself, we are very excited about Web OS, as are the carriers we talk to and so while we do provide applications such as Sprint’s got navigation and it’s got NASCAR and a variety of other types of applications like that, we do bring those kind of applications on. You know, we’re -- our view is that the Web OS experience is a very strong one and we’ve gotten that feedback from our carrier partners as well.

Richard Kramer - ARIT

Okay. Thank you.

Teri Klein

Great. Operator, next question, please.

Operator

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

T. Michael Walkley - Piper Jaffray

Great, thank you. Just two questions here, I guess -- one I know it’s not your policy to break out sales by device but I do believe there is a large range among the sell side for the legacy units. Can you give us any sense of the Pre during the quarter and maybe if not then looking forward, how should we think about non-Web OS products like the Treo longer term?

And then the second question would be expectations for the Pixie at Sprint with this coming as a lower priced device -- do you think this helps store traffic to drive more Pre sales or do you think it cannibalizes the higher price Pre? Kind of your expectations with a few products at that carrier. Thank you.

Jonathan J. Rubinstein

You want me to do the second one first? Okay, so I’ll answer your second one first -- again, we’re big believers in families of products and yes, the Pixie is going to be a more cost effective offering and so we expect that people will come in the stores and some will come in to buy a Pixie and will buy a Pre and some will come in and have just the opposite effect, and that’s been my experience in the past and we are very happy to be able to have both products out in our family now and have them available for our customers for the holiday season.

Douglas C. Jeffries

On your first question, the -- while we don’t give out specifics on SKUs, when you look at our sell-in and sell-through for the quarter, the vast majority of that activity does relate to the Palm Pre.

T. Michael Walkley - Piper Jaffray

-- the commitment to like the Treo and Microsoft longer term, how should we think about that?

Jonathan J. Rubinstein

Well, as we’ve said, we are going to be focusing all of our effort in the future on building Web OS products and so while there are still Centros and Treo Pros moving through the channel right now, our future engineering efforts are based around Web OS because we are absolutely confident in where we are going with Web OS.

T. Michael Walkley - Piper Jaffray

Great. Thank you very much.

Teri Klein

Great. Operator, next question, please.

Operator

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

Jim Suva - Citigroup

Thanks very much. I think many people have found it pretty interesting that the Pixie is kind of going out with Sprint where you’ve already got a footprint as opposed to being diversified more with additional carriers in North America. Can you maybe talk a little bit about, without the details of the exclusivity, I believe it’s on the physical device with Sprint and not the Web OS and if that’s true, wouldn’t it have made sense to have the Pixie come out at another carrier to broaden and diversify things?

Jonathan J. Rubinstein

You know, Sprint did a phenomenal job with our launch of the Pre and we are really looking forward to a great launch on Pixie as well. We think they have some good momentum there. They’ve been a great partner for us. They’ve invested very heavily in advertising and we are really looking forward to doing the holiday season with them with both Pre and Pixie.

Jim Suva - Citigroup

And then the additional carriers, should we expect them to have a different hardware type or is the exclusivity more just the physical product as opposed to the Web OS?

Jonathan J. Rubinstein

I’m not going to talk about the specific roadmap but we will have more carriers and more products in the future.

Jim Suva - Citigroup

Great. Thank you, gentlemen.

Teri Klein

Great. Operator, next question, please.

Operator

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

Edward Snyder - Charter Equity Research

We kind of glanced on this in the last conference call, but you hadn’t had much time under your belt with the Pre but you suggested that enterprise was a little bit stronger than maybe you anticipated at the launch. It sounds like from what you mentioned on the conference call already that it may have actually gotten stronger since then. Can you give us any feeling at all, has the Pre wound up more as an enterprise device than you anticipated? Is it 10% of your sales, 30, 50? It helps to understand where some of the costs are, especially if some of your software updates have been dedicated exclusively to the enterprise. And also gets to the question of cannibalization by the Pixie, which is clearly a consumer device. So any color you can provide in that regard.

And then in the launches that you plan to do, and you mentioned more carriers, more products, given what you know now about the Web OS, would it bifurcate? Will you do a more concentrated offering through devices, say hardware ID for the enterprise or have you not changed your product portfolio based on what you’ve learned about the Pre and Web OS mostly so far? Thanks.

Jonathan J. Rubinstein

You know, we put a product roadmap in place actually a couple of years ago and we are executing on those plans and of course we modify them as we go along based on the things we learn but I would say based on the success we’ve had with the Pre and the early feedback we are getting on the Pixie, I think we are on exactly the right path and so what we need to do is continue to execute the plan we have and just keep moving and that’s what we are going to do.

Do you want to take the first one or do you want me to --

Douglas C. Jeffries

On the first question, we don’t believe Pre is just for business and Pixie just for consumer. We look at these devices as being important form factors that the people have a preference for and I think [inaudible] are out of the market and see kind of where the adoption is but we would expect that both Pixie -- you’ll find both Pixie and Pre in the business community as well as in the hands of consumers.

Jonathan J. Rubinstein

And let me just follow-up on that just a little bit -- what we found early on was the demand was stronger than we expected and so as you pointed out, we did accelerate a variety of those exchange policies, security policies and we are continuing to enhance the offering with updates to make it stronger and stronger in the business segment.

Edward Snyder - Charter Equity Research

But to the point on enterprise itself, did you wind up at the end -- your first full quarter of sales, surprised at how much stronger it was at enterprise than maybe you initially anticipated and can you give us any kind of idea of maybe just generally what kind of strength you are talking about -- 10%, 15%, 50%?

Jonathan J. Rubinstein

I think we are very pleased with the result and it’s not a number we’re ready to give out right now.

Teri Klein

Great. Operator, next question, please.

Operator

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

James Faucette - Pacific Crest Securities

Thanks very much. A couple of questions -- first, can you talk about how we should expect the margins to develop sequentially? Obviously you saw a pretty good improvement here in the August quarter but as we go into the next quarter and we are likely looking at lower volumes and how should we think about the impact of those lower volumes on margins first? And as part of that, how much of an impact will the retail price cut we’ve seen on Sprint on the Pre impact margins in the November quarter?

And then the second part of my question has to do back to follow-up on Mike’s questions regarding legacy product -- I know you’ve made it clear that you are not planning on devoting anymore development resources to legacy products or other platforms but should we expect the legacy products really to be virtually zero in the November quarter or what kind of tail should we expect for those products? Thank you.

Douglas C. Jeffries

Let me start with the second question first -- both the legacy products for Palm OS as well as Treo Pro are active in the market and we expect those to be with us for a few quarters to come. Get them while they’re hot.

And then the question on margin trends, we had a really good outcome we thought in Q1. Our margins, I think to [implicit] in your point, are impacted by volume. There’s a component of our cost of sales that is relatively fixed and assuming we have a lower top line, it will cause our margin, gross margins to be lower in that period. So we are not going to give specific guidance, if you will, but I would expect looking ahead to Q2, you would see lower margins as a result of the volume being lower and then we expect over time to continue our path toward achieving 30% or better in the long run.

Teri Klein

Great. Operator, next question, please.

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, John, Doug, and Teri. The question I had, Doug, was in your discussion about sort of your path to profitability and a return to cash generation, it seems as though you are taking a bit of a step back versus your prior comments and looking towards the midpoint of the next fiscal year versus the end of, or at some point during the next fiscal year. Is that the appropriate way to be thinking about things, Doug?

Douglas C. Jeffries

No, no, maybe it wasn’t clear before -- we tried to say consistently when we talk about the long-term margin opportunity that the 30 plus percent margin for the company comes at a time when we have a portfolio of Web OS products in the marketplace and a time when we’ve got sufficient scale that we can leverage that scale to improve our margins, so there was never a stake in the ground in terms of the timing. We continue to believe that it’s out there for us but right now our focus is growing the business and when we reach scale and we increase the breadth of products we have to offer, we have the opportunity to as I said earlier, to get back to 30% plus.

Amir Rozwadowski - Barclays Capital

And then in terms of operating profitability and cash generation, that also is in line with how you had previously sought those milestones?

Douglas C. Jeffries

Really no change from what we said in the last call, that as volumes increase in the second half of the year, we have the opportunity to become cash flow positive and reach non-GAAP profitability on a quarterly basis.

Amir Rozwadowski - Barclays Capital

Great, thanks. And then lastly, if I may, and following up on James’ question on the guidance for the second quarter, should we expect that to be a quarter where we get material sell-in for your international unit launch of the Pre as well as the Pixie?

Douglas C. Jeffries

We do -- we have sell-in in advance of launch, without question and in both cases, we’ve talked about those products being in the market for the holiday season.

Amir Rozwadowski - Barclays Capital

Great. Thank you very much for the incremental color.

Teri Klein

Great. Operator, next question, please.

Operator

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

Philip Cusick - Macquarie

Can I start with just a little bit of confusion with the guidance for down basically by a third in terms of revenue sequentially, or a quarter to a third sequentially but the majority of the sales were Pre -- I’m a little confused that the fall-off is due to legacy products. So is Pre sort of -- we had the [inaudible] and now it’s steady and then we’ve also got legacy coming off, and so by the third quarter should we be mostly Web OS, or sort of a vast majority of Web OS or is Pre slowing down a little bit more here than we should be thinking about?

Douglas C. Jeffries

No, I think what you are seeing is that we have a very strong launch period with the Pre -- a lot of interest and a lot of demand and as we get into Q2, we reach more of a steady state for Pre and some of the effect you are seeing is a decline in our legacy business.

Philip Cusick - Macquarie

Okay, and then in terms of Web OS versus synergy, or Web OS and synergy versus the recent launch from Motorola of the [Motoblur] product, can you give us your view on how those contrast and how you sort of owning the operation or owning the OS really gives you that advantage over what Motorola can do on Android? Thanks.

Jonathan J. Rubinstein

Sure. We don’t actually -- I don’t actually know much about the Motoblur but I think to build really great consumer products, you have to control the entire experience and you need to own the operating system and the services around that to make that happen, and so I think the fact that we have Web OS as our asset is really important. It allows us to move really quickly, add new capability, bring on new technologies. I mean, what you have seen, for example, is we were the first to ship the TIO map 3. Pixie has the brand new Qualcomm 7627 in it, which we’ll be the first to ship, so it allows us to quickly roll out technologies.

On top of that, it’s -- the user experience is more than just synergy. We have a long list of things that are really great about Web OS and it’s the combination of all of those that gives us a truly world class product. So that’s part of it and the other part is we can continue to roll out more and more capability using our over-the-air update mechanism, which is what we plan on doing. So we are going to be moving very fast and the next year is going to be a very exciting time for us.

Philip Cusick - Macquarie

Great. Thanks, guys.

Teri Klein

Great. Operator, next question, please.

Operator

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

Jonathan Goldberg - Deutsche Bank

Just a quick question -- I was wondering if you could help us one, walk through the math on your true cost of sales and help us get a better picture of the gross margin, maybe save some of us the heartbreak of trying to decipher it all. And then if you could just talk qualitatively about how those trends are looking, gross margin trends are looking.

Douglas C. Jeffries

Sure. Are you referring from the Q4 to Q1 transition in terms of looking at cost of sales?

Jonathan Goldberg - Deutsche Bank

What I am really trying to get at is what Pre gross margins are going to look like and how that flowed through the balance sheet with deferred cost of goods.

Douglas C. Jeffries

Let me just give you maybe a little bit in terms of how the accounting flow works. You know, with the deferral accounting, we defer the direct cost associated with the Web OS products, so we push out revenues, recognize those over 24 months and we push out the direct costs of the products and recognize those over the same period. From a cost of goods sold perspective, the direct costs are only a portion of the cost of the product, so they are -- and our cost of sales includes indirect cost of the overhead, manufacturing staff, teams, other costs that are period costs that don’t get deferred and that’s why you get distortion if you look only at the portion being deferred and estimate gross margins off of that. You need to consider the fact that there’s some indirect costs that flow through cost of sales that affect the ultimate margin on the product.

Jonathan Goldberg - Deutsche Bank

So roughly where are Web OS gross margins at for the quarter?

Douglas C. Jeffries

We don’t break out margins for specific products but the majority of the product sales in the quarter, as we talked about earlier, were our Pre.

Teri Klein

Great. Operator, next question, please.

Operator

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

Paul Coster - J.P. Morgan

Thank you. It seems that the carrier interest is greater than those that have already been named to date, so can you just talk a little bit about what’s restraining you from launching on more carriers than those [main state] and what are your criteria for selecting carrier partners such as Telefonica in Europe?

Jonathan J. Rubinstein

So we are executing a very methodical plan to roll out Web OS products, both in the U.S. and internationally and we are going to take it step by step. We want to ensure that the customers have a great experience, and so when we look at which carriers to work with, we choose those that can not only drive Web OS adoption but can make sure that the customers have a great experience. For example, Telefonica in Europe has a lot of experience selling smartphones and it’s actually their goal to become the smartphone company in Europe and so we felt that they would do a very good job representing Web OS and Palm and really help us get the message out about the differentiated nature and how great the Pre is.

Paul Coster - J.P. Morgan

Outside of the balance sheet, are there any other constraints on growth?

Jonathan J. Rubinstein

Well, we have to -- don’t forget we’re a small company and we want to make sure that we have great experiences wherever we go and that’s why we work very methodically to ensure that and I think that what you will see over time is we will accelerate that progress. You know, we’ve done that in the past. For example, Centro, which sold over 3 million units, we started off slowly but then rapidly accelerated to I think it was something over 30 different carriers on that product before we were done with it, so I would expect to see a similar kind of trend here.

Paul Coster - J.P. Morgan

Thank you.

Teri Klein

Great. Operator, next question, please.

Operator

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

Maynard Um - UBS

Thanks. Two questions on the guidance -- the first follows up on Phil’s; just on my math, your guidance seems to imply Web OS units are going to be down sequentially and I am just wondering why revenue wouldn’t actually be higher because you are going to have a price drop at Sprint for Pre even if that’s steady state. You’ll have launched the Pixie and then you’ll have Telefonica region, so I’m just trying to understand the dynamics of that revenue guidance and then the second question is about the implied back half revenues. At the midpoint, it implies somewhere around $1 billion in revenue in the back half. Can you just talk about the visibility to that and specifically, are there unit minimums that are embedded in the contract that give you that visibility and is it split fairly evenly Q3, Q4? Thanks.

Douglas C. Jeffries

On the first question in terms of looking at the guidance for Q2 versus trends you saw in Q1, it really is about timing so keep that in mind as you think about the trends between the two quarters. We tried to emphasize that in the narrative but the timing of the launches and the size of the launches really do significantly affect the quarter to quarter comparison.

In terms of the full year, we are looking in terms of developing the guidance, we tried to look at -- we did look at products that we have in the marketplace or we have announced as a basis and then beyond that, looking at carriers where we have commitments for products for the rest of the year and that’s really the fundamental set of assumptions that underlay the outlook we provided today.

Maynard Um - UBS

And how should we think about the Q3, Q4 split?

Douglas C. Jeffries

Again, we’re trying to provide the context today as we go from Q1 to Q2, and then looking ahead for full year. We’re not going to provide quarterly guidance on an ongoing basis, so again we’re just trying to give context to the current quarter in terms of this guidance we gave today.

Maynard Um - UBS

Okay, great. Thank you.

Teri Klein

Great. Operator, next question, please.

Operator

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

Simona Jankowksi - Goldman Sachs

Thank you. I just wanted to follow-up on that last comment -- since the guidance is based on products that are already announced and also carriers that you already have either an agreement with or pretty good visibility as far as reaching an agreement, and so I just wanted to get a sense, if we were to think about potential sources of upside to that guidance, timing wise is it possible to still sign a carrier at this point that you haven’t already, who can still ship units within your fiscal year, or with any discussions going on at this point necessarily spill over into the next fiscal year?

Jonathan J. Rubinstein

Simona, we are always having conversations with carriers and looking to build our long-term book of business. I think the guidance we gave you today is kind of our best thinking about where we will land for the full year and in the meantime, we are working as hard as we can to grow the business so we will see how it rolls out.

Simona Jankowksi - Goldman Sachs

Thank you.

Teri Klein

Great. Operator, next question, please.

Operator

Your next question comes from the line of Trip Chowdry with Global Equities Research.

Trip Chowdry - Global Equities Research

Thank you. A quick question on Web OS -- if you look at your competitors’ operating system offerings, they have some native voice application capabilities like voice dialing and voice applications. I was wondering, when do you think Web OS could support native voice applications? Thank you.

Jonathan J. Rubinstein

We have a long list of features and capabilities that we will be adding to Web OS in the future and so -- but I can't give you a specific as to when each feature will be. Just understand that we do have our over-the-air update mechanism which is very powerful because it allows us to deliver incremental updates to all the devices in the field, and it also allows us to develop on a very different cycle than what most everyone else develops on. Most of the other products are developed on really sort of an embedded schedule. We are much more on a web schedule and so we have regular updates that come out and if a feature or a fix misses one release, it quickly picks up on to the next one. So you will see a steady stream of new features and capabilities coming. I mean, we’ve been shipping now for a little over three months and we’ve already had four updates and we have our fifth one coming soon, so stay tuned and you will see hopefully your favorite feature come to the Web OS in the not-too-distant-future.

Trip Chowdry - Global Equities Research

Thank you. All the best.

Teri Klein

Next question, please.

Operator

Your next question comes from the line of Matt Thornton with ABN Securities.

Matt Thornton - ABN Securities

Doug, I was wondering if you can give us a little color on what revenue might have been for the quarter for some of the applications accessories, some other line items, legacy handheld, things along those lines?

Douglas C. Jeffries

Matt, the revenue for the quarter was really about the smartphones and the accessories and the other kind of ancillary items were very, very small -- really immaterial to the overall trends.

Matt Thornton - ABN Securities

Okay, so you’re talking low single digit millions kind of run-rate?

Douglas C. Jeffries

Very, very small.

Matt Thornton - ABN Securities

Gotcha, and second question, I think you started to talk just a little bit about OpEx going into 2Q, the November quarter, sales and marketing would be up quarter over quarter. Did you talk about total OpEx? Because obviously I know you got the new product launches coming out, we’ve got the holiday season ramp here, but volumes in fact will be down and revenue will be down quarter over quarter, so did you give any indication on total OpEx sequentially?

Douglas C. Jeffries

We didn’t talk specifically to total OpEx but we did talk to the fact that in absolute dollars, the marketing spend, marketing sales spend for Q2 will increase over Q1 as we lay down the foundation for the Pixie launch and then the launch in Europe with Telefonica. And then R&D investment, we will continue to invest there, so that balance you would expect to grow as well.

Matt Thornton - ABN Securities

And then on a related second half of that question, as you go into the quarter and sales and marketing again continues to ramp, obviously in the November quarter we are going to have more competition at your core carrier being Sprint. We’ve got two new android devices coming. I was just wondering if you could talk a little bit about what changes we might see in the advertising and promotional campaign in a quarter, and then perhaps how you expect Sprint to position the two Palm products that will be on the shelves by the end of the quarter versus the two new Android products in terms of what will be flagship or how the two might be positioned versus one another.

Jonathan J. Rubinstein

We expect Sprint to put Pre and Pixie front and center in the work that they are doing for the holidays and of course, we’ll be driving it as well and as I said, we have a new SVP of brand design who just joined us recently, Jeff [Lerner], and he is working closely with Sprint and with our other carrier partners to make sure we get the message out there.

Matt Thornton - ABN Securities

Great. That’s helpful, thanks, guys.

Teri Klein

Next question, please.

Operator

Your next question comes from the line of Tim Long with BMO Capital Markets.

Tim Long - BMO Capital Markets

Thank you. Two questions, if I could -- first, understanding that street expectations and the company’s expectations are often different, the down-tick in the second quarter revenues is a little more severe based on what expectations were from the street. Could you just talk about the scale and timing issues that you referenced? Were they different than your expectations? So in other words, was there a push-out of timing as far as you were looking for your second quarter a few months ago? That’s number one and then second, I just want to get into a little bit more on the price cuts on the Pre at Sprint. It’s a little rare to see a price cut like that two months into a new product, a little earlier than I normally would have expected, so who pays for it and what does that signal? Does that men that we’ve reached a saturation point at the $200 level and it needed to get a price reduction to re-spark demand? Thank you.

Jonathan J. Rubinstein

Well, that was a lot of questions all in one, but let me sort of try to break them apart a little bit. You know, first of all, it wasn’t two months, it was longer than two months but we want to aggressively drive into the holiday season and we want what is going to be a very competitive holiday season, as you point out, and we wanted to make sure we were really well-positioned. The Pixie announcement, where we were announcing our family of products, gave us an opportunity to reposition the Pre from a price point of view and Sprint really drives the pricing on this and we work with them to try to optimize the right price points for the right products. And so I think we’ve done that, I think we are very well-positioned for going into this holiday season. I think that because of critical acclaim on Web OS, I think we are going to see a very successful Pixie launch and continued strong sales on the Pre.

Tim Long - BMO Capital Markets

Okay, and then just whether those scale and timing issues were a surprise to you as well?

Douglas C. Jeffries

Yeah, Tim, on that question, no, we’ve actually seen this for a while -- Q2 it will be less than Q1, so it’s not a surprise. We have internal forecasting and planning process that is fairly robust and so we’ve kind of watched it along the way as it developed and thought this was a good time to bring it out.

Tim Long - BMO Capital Markets

Okay, so just to clarify, that means that no push-outs, either by the carrier or production or anything like that, everything is as expected?

Douglas C. Jeffries

Yeah, in terms of our internal plan versus what we are talking about today, there’s been no change in product launch schedule or carrier schedule.

Tim Long - BMO Capital Markets

Okay. Thank you.

Teri Klein

Great. Operator, next question, please.

Operator

Your next question comes from the line of Mike Abramsky with RBC Capital Markets.

Mike Abramsky - RBC Capital Markets

John, you mentioned families of products -- how easy is it for Web OS to adapt to a different form factor, different platform versus your prior experience with, for example, Palm OS and maybe some others?

Jonathan J. Rubinstein

You know, we had a really unique opportunity in being able to develop Web OS and really getting -- start with a blank sheet of paper and sticking with Palm's basic DNA and then being able to use very advanced technologies and the old Palm OS lasted us for 16 years, which is really amazing when you think about it. We are designing Web OS to last us for the next 10 or 15 years and so when we designed it, first of all the team was challenged not just to design it for the Pre or for the Pixie but to design it for a product envisioned three to five years from now, so that we were really forward-looking and not looking in the rearview mirror, and it wasn’t developed to be any one specific product but a family of products. And so we designed Web OS to be for mobile devices, because that’s where we see the major trend in the industry going and we designed it to not have limitations which would stop us from doing the kind of product developments we wanted to do in the future.

Mike Abramsky - RBC Capital Markets

And you are -- sorry, just to follow-up, so your strategy of trying to deal with multiple or perhaps deal with more than one carrier in the market, that was one that was envisioned originally when you put together Web OS in terms of allowing maybe a couple of different form factors in the same market but still using the same OS?

Jonathan J. Rubinstein

Absolutely, yeah. And -- yes, and then also taking those form factors to lots of different geographies.

Mike Abramsky - RBC Capital Markets

Thanks.

Teri Klein

Great. Next question, please.

Operator

Your next question comes from the line of Kevin Manning with BMO.

Kevin Manning - BMO Capital Markets

My question was asked. Thank you.

Operator

Your next question comes from the line of Gerard [Helarin] with Town Hall Research.

Gerard Helarin - Town Hall Research

Yes, I appreciate you taking my call and I think it was a great breakout quarter, so congratulations. My questions really relate to trying to understand your business with Palm because if I listen to you carefully, what I heard was the vast preponderance of the 810,000 units sold through were Pres, and that the vast preponderance of those were with Sprint. Is that about right?

Douglas C. Jeffries

We didn’t say that. We talked about the vast majority being Pre in terms of our sell-in and sell-through. And the majority of the Pres were with Sprint.

Gerard Helarin - Town Hall Research

Okay, so it’s not too far off from a number basis then, if we were to use that to calibrate?

Douglas C. Jeffries

Okay.

Gerard Helarin - Town Hall Research

I’m asking.

Douglas C. Jeffries

I guess what are you calibrating?

Gerard Helarin - Town Hall Research

I’m trying to understand roughly what impact the Pre may have had on Sprint. As you know, Sprint’s been losing customers. They had a better June quarter than I think many expected but I don’t know if the Pre is so strong it can carry Sprint again and I am looking to understand the impact on your company and Sprint. And I know Sprint will say what Sprint wants to say but in terms of your shipments, if I believe roughly 800,000 shipped to Sprint -- and I don’t know if that’s too much of a majority -- that would mean one in four of phones Sprint shipped were Pres and that just seems unlikely.

Douglas C. Jeffries

Yeah, we just don’t have visibility to that sort of information. All we can talk to you about is kind of what our performance was.

Teri Klein

Operator, I --

Gerard Helarin - Town Hall Research

Well, I mean, this is past performance. I would think you would know what your customers bought. Who were your largest customers in the quarter and by what percent of revenue? That will be in the Q, I would think.

Teri Klein

We are -- if you wouldn’t mind, it sounds like you have some questions that we’ll deal with after the call, so we are going to move on to our last question of the day. Operator, next question should be coming from Ilya Grozovsky from Morgan Joseph.

Operator

Please proceed.

Ilya Grozovsky - Morgan Joseph

I would like to understand a little bit -- so if we are to assume that next quarter’s volumes are going to be down at Sprint, and then how do we get to the third quarter, the -- I mean, I understand there will be a launch in Europe but are you assuming that volumes pick up at Sprint toward the Pre and for the Pixie -- or rather, for the Pre -- let’s start with the Pre first. Are you assuming that the Pre volumes pick up? They are obviously decelerating this quarter. And then do you assume that in the third quarter the Pre volumes pick up at Sprint?

Douglas C. Jeffries

In terms of full year, what we talked about is our two product lines selling through to our existing carriers and additional carriers driving the increase in volume.

Ilya Grozovsky - Morgan Joseph

But in the existing -- on the existing carrier side, can you kind of drill down into that a little bit more? On the existing carriers, do you see -- I mean, my assumption would be that this was sort of a high watermark for -- that this was the high watermark for sales at existing carriers in the quarter, you know, whatever unit it is comes out and that it sort of gets slower from there, unless there’s some dramatic change I prices or something like that. So are you functioning under that same assumption or do you think that there would be something that would accelerate sales at Sprint going forward?

Douglas C. Jeffries

Ilya, appreciate the question but we [feel like we’ve given] a really good piece of guidance in terms of our outlook for the business and we are not going to drop down and talk about specific carriers for the products.

Ilya Grozovsky - Morgan Joseph

Okay. Thank you very much.

Teri Klein

Great. So Operator, with that, we are going to conclude our call and that concludes our Q&A session for today. Thank you everyone for joining us for our Q1 fiscal 2010 earnings conference call and we look forward to speaking with you again next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. 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 F1Q10 (Qtr End 8/29/09) Earnings Call Transcript
This Transcript
All Transcripts