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How Palm Blew It


The company's applications push is too little too late.

Editor's Note: Minyanville is excited to introduce Bob Faulkner, who is currently the Managing Director of Cranbury Capital LLC. He's been in the investment business for more that 20 years with an exclusive focus on technology stocks.

The recent New York Times story on Palm's (PALM) applications push should only surprise you from one perspective: The push (not the story) is late, and the window for Palm is -- in the words of Paul Simon -- slip slidin' away.

A number of analysts have questioned the enthusiasm for the new Pre based upon their checks with retailers. That same skepticism should be evident when you look at Palm's filings with the Securities and Exchange Commission (SEC). Palm's purchase commitments at contract manufacturers tell the story in the graph below.

As you can see, the demand for Centro and Treo models had been very weak as Palm worked to clear out channel inventory in the quarters before the Pre launch (June 2009). Immediately prior to that launch, the monthly run-rate of purchase commitments jumped to $118 million. What's odd -- and tends to support the "weak sell-through" thesis -- is the decline of commitments to $108 million exiting the August quarter.

The Palm bulls will argue that you're seeing a steep decline in demand for the older models. With management having announced that it will no longer devote resources to the old Palm OS, the Treo and Centro are dead and it would make no sense to purchase one at this juncture. What this means is that the purchase commitments as of August 31 are most likely 100% Pre and the new Pixi. But my gut feeling is that that was the case exiting the May quarter as well.

Palm knew it was killing off its Treo/Centro business with the decision to cease funding development on the old operating system. I find it hard to believe that it would ship more product into the channel knowing full well that it would become an anchor around any retailer's neck. That's particularly true if it was expecting those same retailers to carry the Pre.

What makes the commitment decline exiting the August quarter all the more interesting is the context for the number provided in the company's 10-Q. For years, the company has indicated that its commitments are based upon its expectations for the subsequent 30-90 days. That's why the number generally tracks future revenue. However, in the August 10-Q Palm management changed the context. The figure reported represents its expectations for the subsequent 30-120 days.

When you consider the fact that the new forecast period includes a new product launch (Pixi), a new service-provider launch, and the Christmas holidays, just what is that telling you about real demand?

I've long believed that smartphone apps will be critical to deciding the winners/losers in this particular market segment. But the platform and the apps make up a virtuous circle.
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