The numbers for Palm's just-announced first quarter weren't bad. Revenues and earnings both came ahead of estimates, and though Palm didn't break out its Pre unit shipments, overall smartphone shipments of 823,000 suggest that they were decent. But alas, the second quarter looks like a completely different story. The revenue guidance range ($240 million to $270 million) given was a far cry from the $344 million estimated by analysts, and implies a healthy drop in Pre shipments during what's historically been a seasonally strong period.
In fairness to Palm, part of the sequential drop is probably due to inventory issues at Sprint
The Pre is definitely a great product. Its innovative features, such as the previewing of applications with "activity cards" and the presence of a "gesture area", show that it's not a me-too device. Unfortunately, the smartphone market has now matured to the point where having an innovative product isn't enough to guarantee huge success. The enormous base of applications claimed by Apple's
It's tough for any new smartphone product, no matter how innovative, to compete with all of that. Throw in ongoing competition from phones running Google's
And Palm's competitive struggles come at a time when the company needs every last Pre shipment for its financial health: Palm burned through $43 million in cash during in Q1, ending the quarter with only $212 million in cash and equivalents to offset its $393 million in debt. Competing head-on with Apple and Research In Motion off of a much smaller revenue base clearly takes its toll. From that perspective, the 11% dilution that will be caused by Palm's upcoming share sale seems necessary.
Looking beyond Q2, there are still some reasons for Palm bulls to be optimistic. Palm's exclusivity agreement with Sprint for the Pre is expected to end in early 2010, after which Verizon
All things considered, Palm looks like it has a good future ahead of it as a niche smartphone vendor offering devices with an innovative software platform. That's a lot more than you could say about it a year ago. But with the company's cost structure being what it is, mere niche status might not be especially profitable. Or, at least, not profitable enough to fulfill the hopes that are now built into Palm's stock price.
Eric Jhonsa has no position in any of the companies mentioned. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Microsoft and Sprint Nextel are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days.