Long wait for Pre spells disastrous quarter for Palm

by Caroline Gabriel, ReThink Wireless

Palm is in the difficult hiatus period between a high profile launch and actual sales. With much of its business effectively on hold as the world waits for the Pre, the smartphone on which the company is pinning most of its hopes, sales of older devices are plummeting, and this was painfully reflected in Palm’s warning of worse than expected third quarter results.

The phonemaker warned yesterday that its third quarter, which ended last week, would be even worse than Wall Street had been expecting. Revenue will be just $85 million to $90 million, compared to the $157 million analysts had been forecasting. Figures have been hit by the wait for the Pre, which is expected to ship by midyear in the US, via a Sprint Nextel exclusive, and may also debut with Vodafone or T-Mobile in Europe.

In the absence of a new product to sell, Palm has been trying to cover the gaps with the Treo Pro high end device, but this shipped late and has not attracted heavy carrier support, and has also been hit by the economic climate, and by developer apathy, given that the Pre will feature a new Linux-based WebOS, pushing Palm’s Windows Mobile efforts to the sidelines and killing PalmOS altogether.

“The much anticipated launch of the Palm Pre remains on track for the first half of the calendar year, but as expected we’ve got a difficult transition period to work through,” said CEO Ed Colligan in the preliminary results statement.

Palm will account for Pre sales, when they start, with the same method Apple is using for the iPhone, recording the revenue over a 24-month period, rather than all upfront, which enables free software updates to be delivered and still satisfy US accounting rules.

Palm appears to have burned through most of the $100 million cash injection it received from Elevation Partners in December, and the company is now considering other sources of capital. It is expected to have cash, cash equivalents and short term investments worth $215 million to $220 million at the end of the quarter.

“Although Palm believes it has sufficient cash, cash equivalents and short term investments to meet its working capital needs under its current operating plan, the company intends to strengthen its working capital position, and is currently evaluating options in this regard,” its statement said. The markets have been concerned at the high level of cost that will be required to market, promote and support Pre, in a highly competitive smartphone market.
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