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Why Palm's Tomorrow Looks Bleak


An acquisition seems unlikely and the company is burning through cash too fast.

Palm (PALM) shares had been heading south long before the company announced that revenue wouldn't even be in the same ballpark as street consensus. Since then, there has been a steady stream of prognosticators, professional and otherwise, waxing on the company's future. Most of these seem to believe that Palm's failed attempts to succeed in the highly competitive smartphone market make it an attractive acquisition candidate.

I too thought Palm should be acquired… two years ago. Now it's simply a pile of what could have been accelerating toward the scrapheap of technology trivia.

Motorola (MOT) has frequently been singled out as a White Knight for the Palmsters. Let me get this straight. After spending the last two years rationalizing its platforms, semiconductor suppliers, and software and bleeding billions, Motorola is now supposed to cast those efforts aside and re-complicate its operations. And this is a good idea because…?

Nokia (NOK) gets repeated mention in the Palm sweepstakes. That makes perfect sense as well. After buying 100% of Symbian in an effort to control its own "open platform" in a battle against iPhone (AAPL) and Android (GOOG), Nokia should confuse its partners by buying Palm. Ask yourself, just what does Palm have that Nokia would want?

Others expect an acquirer to come out of the computer space, like a Hewlett-Packard (HPQ) or Acer. That presumes the prospective acquirer has an interest in developing and supporting the budding webOS development community. Since they elected to leverage an existing Windows development community in the computer market, why would they choose a "go it alone" strategy in smartphones? Besides, they already have the functional equivalent of the Windows model in Android.

Palm isn't failing because of lack of support by its carrier partners. It's failing because its "hook" -- a muli-tasking operating system -- has meant little to nothing to potential buyers. As Gertrude Stein once said, "There's no there there."

Like most products, programs, or politicians that whiff, the problem isn't the product, program, or politician. Au contraire! It's always that we didn't get our message out; we didn't spend enough money; we didn't do it long enough; yada, yada, yada.

Palm's heading down that long and winding road to oblivion.

Generally, numbers don't lie. If you remember the chart below in my Palm comment of December 30, it seemed impossible that the company could meet rising expectations on what amounted to a muted build at contract manufacturers. Now we know they couldn't.

If there remain true believers out there, what you have to watch out for going forward will be the cash burn rate. That's what investors have been telling the market as they've pummeled the stock down 42% in the last 30 days.

Palm reported cash generated from operations of $17 million last quarter after a burn of $45 million in the first quarter of the fiscal year. But to squeeze into positive territory the company allowed payables to run up by 68%, or $67 million, from the prior period. Those will have to be paid. Adding to the positive cash flow was a net increase of $87 million on the net of deferred revenues and deferred COGs. Keep in mind that this was from the shipment of some 783,000 units in the fiscal year's second quarter. Obviously, shipments won't be anywhere near this level going forward so it's highly unlikely it will add much to cash flow. Lastly, on lower revenue the losses will be bigger and that will provide much more pressure on the ability to generate cash from operations.

The bottom line here is that this puppy will start burning through cash like a drunken sailor and there will be little management can do about it.

I do believe in miracles but I doubt this will be one. If it is, you can flame me when it happens.
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No positions in stocks mentioned.
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