Palm earnings: 'Underperformance' is disappointing; So is the outlook

Palm's third quarter earnings were disappointing but executives say there's still plenty of potential.

Things are not looking good for Palm, despite the optimism from executives that they can still turn things around. As expected, Palm reported dismal earnings for its third quarter - and the company said today that fourth quarter revenue would be less than $150 million, less than half of the $305 million that Wall Street was expecting.

Last month, the company sharply cut its outlook for the third quarter and fiscal 2010 because “driving broad consumer adoption of Palm products is taking longer than we anticipated.” That seems to be carrying into the fourth quarter.

For the third quarter, Palm reported a non-GAAP net loss of $102.8 million, or 61 cents per share, far beyond the 42-cent loss Wall Street had been expecting. Non-GAAP adjusted revenue was $366 million, which was actually better than the $316.2 million that Wall Street had been looking for, following Palm waving of warning flags last month. Analysts had originally expected revenue of $424.7 million in revenue until Palm said last month that non-GAAP revenue would be between $300 million and $320 million for the quarter. (Statement)

Despite the warnings and poor performance, the company narrowed the loss from the year ago quarter non-GAAP loss of 86 cents per share. But the quarter's performance has a number of asterisks tied to it. For example, the higher than expected revenue was due to some shipments being shifted from Q4 to Q3. And even though cash was flat from the previous quarter, the company said that cash burn in the fourth quarter will be much higher because of timing of payments and the costs of promotional incentives.

In a statement, Palm chairman and CEO Jon Rubinstein said:

Our recent underperformance has been very disappointing, but the potential for Palm remains strong. The work we’re doing to improve sales is having an impact, we’re making great progress on future products, and we’re looking forward to upcoming launches with new carrier partners. Most importantly, we have built a unique and highly differentiated platform in webOS, which will provide us with a considerable – and growing – advantage as we move forward.

On a call with analysts, Rubinstein pointed to strong reviews of the devices and OS but said that the company was held back by unforeseen challenges, including the company's own "execution missteps," tough marketing challenges and a highly competitive environment.  He elaborated on efforts that the company is taking to turn things around, including increased training at the retail level so that sales associates have the training they need to sell Palm products to customers. In addition, the company has intensified its marketing efforts, such as a new ad that's debuting during March Madness basketball games.

Partners are also helping, he said, noting that both Verizon and Sprint are featuring Palm devices in their television commercials and are playing up "the unique functionality" of WebOS.

Palm has struggled to make a name for itself in a competitive smartphone landscape that was already led by Research in Motion and Apple, makers of the Blackberry and iPhone, when Google entered the market with its Android operating system, which has since gained traction where Palm hasn't.

The company clearly isn't in the best shape and will face some even greater challenges as it tries to keep up with the changing market. The rumblings of Palm being ripe for takeover - given the value of its patents and technology in the WebOS mobile operating system - is definitely out there. Asked about it, Rubinstein said he would not comment about speculation surrounding possible acquisitions and that the company would not be distracted by rumors. But, he also acknowledged that, as a public company, the board of directors would be obligated to consider such offers if they were received.

For now, though, the team at Palm remains bullish on a turnaround for the company and is convinced that innovation and desirable devices will help the company with its efforts.

Shares of Palm were up more than 5 percent in regular trading, closing at $5.65. Initially, shares were up slightly in after-hours trading but dipped sharply after the company announced its Q4 outlook, down more than 11 percent.

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