Pre Aside, Palm Isn't Quite Out of the Woods
Everyone, it seems, it excited about the Palm Pre. Those who have been granted time to fondle the Pre praise its features, the press is welcoming it with a fanfare worthy of the iPhone, and investors have tripled Palm’s price to $9.42 as of Friday’s close, its highest level in 18 months. But as hungry as investors may be for a feel-good story, they risk getting ahead of themselves. Even if the Pre is a smash hit, the journey from crisis to turnaround to recovery is a long one, and one that produces a lot of baggage. And when it comes to financial baggage, Palm already has more than its share.
Financially speaking, Palm is still a mess. In its most recent quarter, revenue fell 91 percent from the previous year, while gross margin collapsed from 30 percent to less than 5 percent. Cash on hand dropped to $131 million from $263 million.
Even after raising $104 million via a stock offering last month, Palm’s losses could go deeper still. With the Pre and all other devices powered by WebOS, Palm is counting revenue in a drastically different way. To Palm, Pre customers are buying a two-year subscription to a software that will be updated regularly for free. Instead of recording revenue when a product is sold, it’s recording 1/24 every month for two years. At the same time, other costs — marketing expenses, R&D, interest on loans, taxes and writedowns — won’t be recorded over two years, but as they are incurred.
So Palm’s marketing campaign launching the Pre will be subtracted from revenue right away. But revenue from Pres sold in the second half of this year won’t fully show up until the end of 2011. And a lot can happen between now and the end of 2011.
Want more baggage? Palm says it’s facing impairment charges in future quarters from the decline in the value of its investments in auction rate securities. In the past nine months, these securities have led to $33 million in charges. And it’s saddled with $400 million in long-term loans. The terms of those loans may prevent Palm from raising more capital to stay competitive.
None of this means Palm is necessarily in trouble. But Palm bulls will need to be patient and willing to face uncertainty. Analysts are at a loss to project Pre sales two or three years out when the economic outlook for just the next six months is so unclear. And while the Pre may find itself at the head of the pack at launch, this is a fast-moving pack, full of some very innovative and cash-rich tech companies such as Apple, Google and RIMM pouring resources into it.
Some of these issues might also concern those companies said to be considering a takeover of Palm, such as Dell. Putting an offer price on Palm will be tricky, to say the least. What bid do you make on a company that has in the last 12 months lost $68 million, burned through $105 million and yet seen its market cap rise $700 million on the promise of a product that has not only not been released but whose release date hasn’t even been announced?
On top of that, an acquirer will have to make the bid appealing to a nine-member board that is dominated by Palm officers (two seats) or Elevation Partners, its venture backers (three seats). That could lead to an epic round of Microsoft-Yahoo style haggling over the true value of a company in the midst of an expensive turnaround.
So while consumers may be delighted with the Pre, the future is a lot less certain for Palm investors.
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The turnaround is going to be hindered by the fact that the Pre is exclusive on Sprint for 2009. No one wants to go to Sprint.
I will be ditching my iPhone for a Pre when it goes GSM.
I would still like to see a Blackberry Curve form factor device with the WebOS. The Treo Pro was horrible – who let a device out like this with such a shitty keyboard?
You don’t have a clue but are just circulating a bigoted stance towards Sprint that you heard from some fascists at Apple!! Sprint is by far the cheapest service with the best network there is for 3G. Don’t speak unless you know moron. Well we already know you currently have a service with a bloated monthly charge for what little service you get. I have paid less then $1000(more likely $1400 less) of what you have paid for your ATT service on your Ifone so that shows you how smart of an investment you made already and goes to show you make bad decisions!!!
Let me get this straight, you really don’t like Apple, and you use Sprint, right?
I would agree that Palm will have an up hill battle, and I cannot stand AT&T. Alas, the iPhone that I do like, is tethered to that service. But, was I really that fond of Verizon? No.
Palm also faces a market that is growing, but without a smart phone to progress from. RIM and Apple have distinct shares of the market based upon their strengths — media for Apple, and text for the BB. What is the Pre? Both? Why wouldn’t a keyboard on the iPhone accomplish the same?
Apple will have a completely new model out by the time Pre launches. They may very well have more than one. So, the WebOS looks nifty from the perspective of January, but does it from June? Also, why are WebKit applications so appealing, wen they were not when the iPhone launched, ironically with WebKit. Why will the Palm with Webkit be better than the iPhone with WebKit?
I’m not buying Palm’s resurrection. Will they sell a million a month in the face of Apple, RIM, and Android? Time will tell, but my bets aren’t on them.
The cost of a buyout of Palm is about $2 billion if NO premium is paid above the current price (common shares, Preferred shares, debt payoff).
For an untested phone running an untested operating system and pretty much nothing else of interest to any of the companies that would be “willing” to pay $2 billion without thinking about a premium.
Think that’s going to happen?
Sprint…eww. I’m a lot less excited about the Pre now.
I cannot see that a single phone without much really new about it will gain great favour in a market that is already served by established products with extensive support. The biggest differentiation is the carrier and personal animosity towards specific ones. But that is not a reason for success or failure – look at the iPhone, especially in Canada, which only comes from Rogers.
The main thing going for/against any smartphone is the variety and quality of software. iPhone has it, Blackberry has some expensive business aps, and may buy its way in. Is there really a place for third or fourth in that race? Sure the players are big, but even they cannot afford long bleeds in this business environment.
Would Dell become a player if they bought Palm? They’ve had one good concept and have never show any skill at regenerating failed companies. Perhaps they should stick to what they know and stay out of a competition they are sure to lose. It may be obvious, in my opinion, Palm is going to fail – alone or as a buyout of any larger company. Their innovative years are over and they never capitalized on the creativity when they had it, in both the consumer and business markets.
Apple and Rim own the market. Symbian products may survive in Europe. The rest will fail, and most fade out completely. The only chance a company has to get into the market now is with a totally new and unique offering that will give them a couple of years to establish while the others try to catch up. I don’t see that anywhere.
Let me know when the Pre can play at this level and I’ll consider it.
Honestly- I don’t understand why everyone has such a low opinion of sprint.
Verizon might have a better network in places, but you pay through the nose for that privilege.
And which network does more to handicap their devices? Verizon.
And maybe its just me personally, but I have had issues with customer service and billing issues with Verizon.
AT&T is a joke. I have it through work and it basically sucks.
Sprint isn’t bad. Decent selection of phones. And their customer service works with you- tries to make you happy. Yes, because they are afraid you will leave.
Verizon & AT&T just lord over you because they feel you don’t have a decent alternative.
As for the turn around of Palm- think about this- Palm sold a boat load of centros. All those people have probably gotten use to the keyboard & the general experience of the OS. They sold them at low margins. Gave them away, basically. Partly to survive. But its a bit like the drug dealer model- give it away free, get them hooked, raise prices.
The Pre is the ‘Raise Prices’ in this model.
The biggest issues for Palm will be 1. Bugginess of new OS – they have a HORRIBLE track record- I know as I have bought many of their ‘Beta’ products (650/700p) 2. Can their hardware hold up. Too many of their phones develop physical QC issues- crooked screens on Centro, Treos that burn out, cracked frames, etc.
If you are a potential investor & are thinking about playing their stock, go read some of the community boards – treocentral.com is the one I frequent.
The only problem with giving away the Centro is that the Pre is a completely new OS. Secondly, regardless of how many Centros sold, Palm is still hemorrhaging market share. There will perhaps be room for any players, but not the whole point of the article is that Palm has to do better than average to dig out of debt.
I think the issue people have with Sprint is a brand one. The company is itself in turnaround, it lost 1.3 million subscribers in the last quarter (AT&T and Verizon both grew) and it must overcome a reputation for poor customer service. To be fair, Sprint is working to address these things, but I think they are still factors in many buyers’ minds.
Apple should just step in and offer a 500% premium over last close and shut Palm down and take the patent portfolio and engineers and expand the iPhone line. with over 28 Billion in cash Apple would hardly miss the money and I doubt there are many investors in this market that would turn down making 5 times on their money.
hmm,
Michael Dell famously said the same about APPLE.
We all know what happened after.
PALM will be back, they got more devices planned.
The article is missing the point about the planned new devices and the money they can bring.
Also the GSM version will make extra money for PALM.
They can have an exclusive partnership with some big carrier in Europe ( they are talking to ORANGE) and sell some more there.
Everyone has more devices planned – I don’t know why people keep repeating that line when it comes to Palm. The question is will they have the funding to finish developing, manufacturing, and marketing anything else if sales of the Pre doesn’t provide sufficient cash flow going forward. All its competitors will.
Palm made this choice, as have MicroSoft and Apple, to make their revenue stream more attractive, not less. You don’t have analysts freaking out just because your new sales are only 5% ahead of the prior quarter, because the numbers can be hidden. (It also obscures details of the revenue-sharing with the network, and also allows the firm to manipulate how it presents this information to those who bet from the sidelines.)
Just as with the controversies over options expensing, mark-to-market and this revenue-smoothing, companies really want to prevent their shareholders (i.e., the capitalists whose financing allows the firm to exist) from knowing too much about what’s going on.
I agree with the sense that this is a negative for Palm; it means they’re spending more time spinning and putting partners such as software developers at risk by hiding the chance that the whole thing will collapse before a dev can sell any software. But I think you were focused on simpler issues, such as a slower ramp-up of revenues. In that regard: however they put the dollars on the books, it doesn’t change how much they collect by one iota.
Walt,
Good points. This will make Palm’s revenue less volatile over time. My point is not that the new revenue model is bad, but that the shift to a new revenue model will take a while.
It’s also worth noting that the change won’t affect cash flows, so Palm is likely to emphasize that number for a couple of years. But fairly or not, many people prefer to focus on profits.
The Pre is a joke. It does’nt even have a real development environment; just “widgets”. Apple has nothing to worry about. I’m not sure the Pre is even a major threat to RIMM.
You need to do a bit more research Tom.
The Pre has a full dev environment. Access to contacts, calendar, media, location, etc is available via their sdk.
The big advantage Palm has with the webOS is how quickly developers will be able to crank things out in html/js/css
All that code those developers are “easily and quickly” cranking out will be exposed for anyone to copy at their heart’s content – totally source-code revealed (unless, of course, Palm does some weird program hiding that’ll get hacked on Day One).
The REAL programs for the Pre won’t be around for AGES and will be cloud based with only User Interface code resident on the phone itself.
We’re on the mailing list for a dev whose niche (language) program we’ve used for many years now. First available on the Palm/Treo platform, then WinCE, he (small shop) is now close to having it ready for the iPhone.
But he doesn’t see the needed resources to port it to the Pre/WebOS. I haven’t asked him to expand on that; I’d rather he focus on the iPhone, since we now both are nurturing our aged Palms only until we can go on to our iPhones. So at least from one *real* developer’s perspective, the Pre is a low-horsepower environment. My *guess* is that it’s fine for apps that interact with web-based hosts, but lacks industrial-strength databases, gesture/drawing tools and/or state information that are not characteristic of most web-based apps.
So yes, speed matters. But also, a rich, local-OS-class environment.