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Palm Proves That It Missed the Train

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The company continues to struggle with new products and technologies.

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Last night's numbers from Palm (PALM) were just plain ugly. Yes, they were 20% ahead of revised revenue guidance until you realize the upside was pull-forward from the fiscal year's fourth quarter. What looks like great control of its cash burn (only $0.5 million) was little more than another timing issue.

Since the magical launch of the Palm Pre nine months ago, the picture has been anything but pretty as you can see in the graph below.



To hear management tell it, their product training and message are the sources of their woes. The company "discovered" that the sales staff at Verizon Wireless (VZ) was inadequately trained. Really? How were the Sprint (S) personnel trained nine months ago? After acknowledging weak sell-through at Sprint last quarter along with "aggressive efforts" to combat the issue, it arises again at Verizon Wireless 90 days later. What's wrong with this picture?

We were told that the 12% ASP decline last quarter was due to the late launch of the Pixi at Sprint on November 15, only two weeks before the end of the quarter. Now another 2% decline in ASP is the result of the launch at Verizon Wireless, seven weeks before the close of the quarter. Something's not adding up there.

Updating webOS in real-time was highlighted as a competitive advantage for Palm with subscribers. The company indicated it's been updated 10 times in the last nine months. How many of those updates have been to fix bugs and performance issues versus new features and functions? Is that a sign that the product was introduced prematurely?

Don't let the cash burn fool you; there was more than a $90 million positive contribution in the quarter from other accrued liabilities. Those liabilities are going to come due. Add to that the $45 million charge to COGs by contract manufacturers for the failure to meet purchase commitments. Palm's purchase commitments extend over 15 months so there is the possibility that further deterioration in demand will lead to additional charges.

Palm's CEO Jon Rubinstein said, "Remember, webOS is a brand-new operating system, and it takes a while for the people in the stores to get accustomed to something new." You could feel his frustration again in the statement, "If I look at new technologies and new products that have been brought to market, it's very rare that you see something just sort of take off. It takes a while to build momentum to get to that tipping point." While I appreciate the difficulty of his task, those hurdles didn't see to impact the iPhone (AAPL) and, to a lesser extent, Android (GOOG) phones? The train has left the station here and it's not waiting for anyone.

Management highlighted their "focus, execution, and continued industry-leading innovation" as the keys to their success. Unfortunately, from where I'm sitting, I see a lack of focus, the failure to execute, and few people are buying into the innovation argument.
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