Palm Disappoints, Teeters On The Brink Of Failure

When Palm demo'd the Pre a year ago in January, the phone was seen as the company's last chance to reverse its fortunes. Despite positive reviews and praise for the company's WebOS and Palm Pixi, the once-dominant cell phone and PDA manufacturer has continued to lose ground (and money). For Q3 2010 Palm reported a loss of $18.5 million. That's significantly better than a year ago, when the company lost $95 million, but the company's quarterly results are ominous for multiple reasons.

First off, there's an awful lot of unsold inventory building up in partner stores. Palm may have shipped 960,000 phones last quarter (up 300 percent year-on-year), but its sell-through figures were much lower at just 408,000. That's a 23 percent decrease quarter-on-quarter. Worse, Palm's fiscal Q3 covers the Christmas buying season (which may have improved sales) and the company offered special deals through the same time period.

"Our recent underperformance has been very disappointing, but the potential for Palm remains strong," said Jon Rubinstein, Palm chairman and chief executive officer. "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."

Wall Street doesn't believe it and to be blunt, we don't either. Solid products, deep discounts, two refreshes (both the Pre and Pixi now have 'Plus' flavors), and a strong OS offering have collectively failed to ignite widespread consumer interest in the company's products. Rubinstein talks about Palm's potential remaining strong, but the company may have literally run out of time. Palm's stock was hammered after its announcement, falling 12 percent to just below $5 before the market closed on Friday. We're already seeing investor speculation that the stock could actually fall all the way to $0 as investors flee the dying company.

Palm's best bet—and maybe it's only chance to survive in any meaningful way—is to start aggressively shopping around for an interested buyer. The fact that Palm has been unable to draw support for its WebOS in the face of competition from both the iPhone and Android is more a sign of supremely bad timing than a judgment on the company's value. Hopefully the likes of Google or Nokia will make Palm an offer. Brave words aside, it's hard to envision a scenario in which Palm triumphantly returns to profitability on its own.