Palm struggles to stay in the race

Palm faces a fight for survival as intensifying competition and a series of management missteps have sent its market share and share price tumbling, leading some analysts to question the company’s future.

The world’s sixth-largest maker of smartphones last week warned that sales of Palm Pre and Palm Pixi – its key products – would be $150m for the current quarter, less than half analysts’ expectations.

“Palm’s troubles will only accelerate as carriers and suppliers increasingly question the company’s solvency and withdraw their support,” Peter Misek, an analyst at Canaccord Adams, said in a research note.

The US group has cash, cash equivalents and short-term investments of $592m and long-term debt of $387m; giving it a net cash position of $205m. Third-quarter revenue actually rose to $350m from $90m in the year-before quarter, although the company has posted a net loss for the past 10 quarters as costs have risen markedly.

What is more, the revenue numbers reflect sales to stores – not to consumers – and inventory at those stores has built up dramatically, which led to Palm’s sales warning last week.

“With what appears to be roughly 12 months of cash on hand, an accelerating burn rate, a complete lack of earnings visibility, and substantial debt and preferred equity, we no longer see any value in the company’s common equity,” says Mr Misek.

Palm, which helped pioneer handheld computing in the 1990s with the Palm-Pilot, began to struggle a few years ago because its family of Treo smartphones could not match the power and performance of rivals such as Research in Motion’s BlackBerry or new entrants such as Apple’s iPhone.

Following a series of management missteps including the cancellation of several new products, Palm finally trumpeted its return to the forefront of smartphone innovation with the Palm Pre, powered by a new operating system called WebOS.

The Palm Pre was a success for a few weeks. But in the face of a range of new smartphones, including new Android-based devices from HTC, Google and Motorola and the continued success of the iPhone and RIM’s BlackBerry family, Palm Pre sales stalled.

In each of the two quarters after its release in June, sales dropped on a month-by-month basis. Sales of both the Pre and Pixi combined were 408,000 in the three months to the end of February – a fraction of the 8.7m iPhones sold by Apple in the same period.

According to Strategy Analytics, market research firm, Palm’s share of the US smartphone market fell to 4.2 per cent in 2009 from 6.5 per cent in 2008. This is quite a distance from RIM, whose BlackBerry holds 47.8 per cent of the market, compared to 50.3 per cent in 2008, and Apple, whose iPhone holds 24 per cent from 16.6 per cent in 2008.

Meanwhile, Palm’s shares are down nearly 60 per cent over the past year, on Mopnday trading up 1.4 per cent at $4.06. Shaw Wu, analyst with Kaufman Brothers, reduced his recommendation on Palm’s stock to “sell” from “hold” and told clients: “We are unsure of Palm’s prospects as an ongoing concern”.

Jon Rubinstein, Palm’s chief executive, last week acknowledged that the company’s recent underperformance had been “extremely disappointing. We’re very realistic about our near-term challenges” and insisted, “the issues we’re facing are far from insurmountable.”

In particular, Mr Rubinstein, a senior executive at Apple before joining Palm three years ago, suggested that Palm would need to spend much more on training sales staff in the stores owned by network operators to sell its handsets. “It’s become clear that more intense training efforts are necessary at point-of-sale to ensure that field sales reps can confidently recommend webOS products,” he says.

Nevertheless, analysts and investors were clearly shocked by the scale of the inventory buildup at stores and the projected sales shortfall in the current quarter.

Analysts say Palm will be forced to discount prices, take charges for inventory and accept lower gross margins in order to reduce the inventory of unsold Pre and Pixi devices.

Palm was given some positive news on Monday when AT&T, the biggest US telecoms group, said it would start selling its mobile devices in a few months time. This may alleviate some of the inventory build-up. For now, though, the turnround is in danger of being disconnected.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.