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Palm left with 57% of smartphones unsold in Q3

Poor sales at Verizon create inventory build-up, halving Q4 revenue outlook

By CAROLINE GABRIEL

Published: 19 March, 2010

READ MORE: Financial | Palm | Handset | WebOS

It may not be long now before someone puts Palm out of its misery. CEO Jon Rubinstein told analysts the board would consider any "reasonable offer", while refusing to be drawn further on intensified takeover speculation, after the firm's Q3 results revealed very slow smartphone sales.

The problem is that it is now difficult to see who would acquire Palm. All the firms that might have wanted to get hold of a modern smartphone hardware and software platform, and Palm's user base, a couple of years ago, now have their products in place. And while Palm is getting more affordable, its customer base is getting less attractive.

Before the Pre and then its smaller stablemate, the Pixi, shipped, a string of poor results could be blamed on Palm's transition period, as it moved towards an open source, iPhone-class offering. Now, the Pre and Pixi are the main elements to blame for Q3 results that Rubinstein admitted were "deeply disappointing to me", and a disastrous Q4 outlook - revenues of $150m or less, when Wall Street had expected twice that ($306m was the consensus).

The awful fourth quarter will be an "exceptional situation", insisted CFO Doug Jeffries - but one that only highlights the failure of the smartphones, A major factor will be the build-up of excess inventory of Pres and Pixis, after disappointing sales, even as margins get squeezed by the increasingly expensive effort of trying to market them more effectively.

Rubinstein and Jeffries were clear that Verizon Wireless was the major problem in Q3. Both the Palm phones launched as Sprint exclusives and experienced take-up that was steady, but well below (sometimes wildly over-ambitious) expectations. But Palm and its supporters had put a lot of faith in a significant uptick once Verizon Wireless, as well as international players like the UK's O2, started to sell its handsets too.

The timing was poor at Verizon, the executives argued, because although the carrier got updated versions of both devices (the Pre Plus and Pixi Plus), it had already launched the Motorola Droid, with huge marketing effort and as the flagship of its Android strategy. The execs might well whine - timing has been Palm's failing all along, from the failure to respond to the iPhone for so long, to the overlong lead time between the Pre's hugely impactful launch and actual shipment.

And given the love affair of Palm's main market, the US, with Android - as epitomized by the Verizon Droid - the firm must be questioning why it decided to go it alone with webOS, rather than layering its advanced open web framework on an OS with real market mass.

In the third quarter, Palm actually beat analyst forecasts on revenue, which rose to $349.9m from $90.6m a year earlier. It also narrowed its loss dramatically, to $22m from a year-ago figure of $98m. However, it should have been able to make a profit, had its main phones being living up to expectations, and it seems that in Q4, revenue will only be up by one-third year-on-year (even though a year ago, the Pre still had not shipped).