How Long Can This Rocket Fuel Last?

By Anders Bylund (TMF Zahrim)
June 26, 2009 | Comments (1)

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Judging by Palm's (Nasdaq: PALM) fourth-quarter results, the Palm Pre has a lot of heavy lifting to do. Lucky for Palm, the Pre is taking off like a rocket.

The Pre was released into the wild after the fourth-quarter books closed, so this is a snapshot of the desperation Palm was facing without its latest, greatest smartphone model. Sales stopped at $86.7 million, down a heart-stopping 70.7% from the year-ago period. Net losses per share nearly doubled to $0.78.

With $152.4 million of cash and equivalents on hand, Palm burned $76 million of free cash flow last quarter. That's simply not a sustainable business. Is the Pre good enough to get Palm back on track?

Well, reports are that Sprint Nextel (NYSE: S) shifted 150,000 Palm Pre handsets in its first 18 days on the market. Consider that Palm sold only 351,000 phones in all of last quarter, and the Pre is looking pretty good.

That's still a far cry from Apple (Nasdaq: AAPL) and its ability to sell 1 million new iPhones in three days, or the constant flood of new models and new subscribers for Research In Motion (Nasdaq: RIMM) and its BlackBerry phones. But if demand for the Pre stays at these levels for a while, it could be enough to see Palm through to positive income and cash flows by the end of the year.

Why do I pin the recovery to New Year's Eve? Because that's right about when you should expect Sprint's exclusive distribution deal for the Pre to expire, so the big boys from Verizon (NYSE: VZ) Wireless and AT&T (NYSE: T) could potentially get their hands on it.

Sprint is a distant also-ran in the wireless marketplace, with far less reach into consumer pockets than its bigger rivals. A wider distribution network would most likely multiply the demand for the Pre, given that it doesn't get entirely upstaged by a flood of new competition in the meantime. I'm keeping a keen eye on the Google (Nasdaq: GOOG) Android platform, which is supposed to see several product launches this year across multiple networks.

Your resurrection is off to a good start, Palm. Let's just hope that you have enough rocket fuel to start the afterburners.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2009, at 9:52 AM, InfoThatHelp wrote:

    Compared to most other American businesses in distress such as GM, Palm is a bright promising little enterprising upstart with every gain another triumph forward. Palm has a vaunted product in Pre but what Palm needs the most now is a compelling product family. What Palm should do is to target a wide audience with the same intense focus - the medium sized American and European business community who must use a more advanced smartphone than blackberries but cannot afford the high cost of BES or the Rim business network. Besides, the Rim infrastructure is way too restrictive and fancy for practical business needs anyway. BES offers way too many unwanted features charging extraneous license fees. Palm could and should co-venture with Harvard, Stanford, UCLA, hospitals, community organizations in developing a robust and dynamic smartphone management software targeting the cloud computing platform.

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