Highlights From PALM's Q3 Conference Call: Recent Underperformance is Extremely Disappointing; Guides Well Below for Q4 Revenues
Palm (NASDAQ: PALM) reports Q3 adj-loss of $0.61, versus the analyst estimate of ($0.42). Revenue for the quarter was $366 million, which compares to the estimate of $316.19 million. Shares are crumpling, down 23.01% today
Highlights From PALM's Q3 Conference Call:
(Jon Rubinstein, Chairman and Chief Executive Officer) Our recent under-performance has been extremely disappointing to me personally and to the entire Palm team, but we are more committed than ever to delivering truly innovative mobile experiences to propel our company forward and build value for our stakeholders.
As part of every new webOS product launch, Palm provides in-store sales personnel with significant training, recognizing that our platform represents a new and unique user experience.
We'll continue this work until we're satisfied that customers who walk into a store can easily understand the value proposition of a Palm product.
In addition to intensifying Palm's point-of-sale training support, we're working to increase the effectiveness of our marketing to better communicate the benefit of Palm products.
Both Sprint (NYSE: S) and Verizon (NYSE: VZ) are prominently featuring Palm products in their national TV campaigns.
We've seen improved product knowledge at the stores we worked with.
We're moving forward at full speed to continually improve product quality and bring new innovation to market.
At the end of February, we made webOS 1.4 available. Palm's tenth over-the-air update since we first launched nine months ago.
Customers' response to 1.4 has been great, and the message we hear across feedback channels is that people are thrilled that webOS is just getting better and better.
Our App Catalog and the developer tools powering its growth are also increasing in both scale and quality.
We have over 2,000 apps in our catalog today, more than twice the amount we had in January.
Our completely re-designed Facebook app has generated a wave of positive reaction, as have much other awaited offerings like Kuala and Epocrates.
We feature over 35 3D game titles in our App Catalog, and they've been a big hit with users.
(CFO) All costs of revenues are recognized upon product delivery. This change in accounting has no impact on cash flows, and does not change how Palm reports legacy product sales like the Centro or Treo.
Now turning to our Q3 results, revenues for the third quarter came in at $366 million, compared to $302 million in Q2.
In Q3, we shipped a total of 960,000 smartphone units, compared to 783,000 units in Q2. Third quarter deliveries were virtually all webOS products.
Our combined smartphone ASP was $367 in Q3, compared to $375 in Q2.
The slightly lower ASP resulted primarily from increased shipments of the lower price Pixi. Total smartphone sell-through for Q3 was 408,000 units, compared to 573,000 units in Q2.
We believe that sequential decline was due to declining sales of our legacy products, and post holiday sales deceleration, offset in part by sales at Verizon.
Our gross margin for Q3 came in at 17% and was impacted by a $45 million charge taken in the quarter for inventory purchase commitments, which exceeded forecasted demand. Excluding the impact of this charge our gross margins for the quarter would have been 30%.
Total operating expense for Q3 came in at $162 million versus $133 million in Q2.
Turning to the balance sheet now, our accounts receivable balance increased to $104 million at the end of the third quarter versus $68 million at the end of Q2 due to higher third quarter sales volumes.
Our inventory levels at the end of Q3 at $31 million were lower than the $39 million reported at the end of Q2, due primarily to the timing of deliveries near quarter-end.
Accrued liabilities at the end of the third quarter increased $90 million to $290 million at the end of Q3 due to higher reserves for inventory purchase commitments and accruals for product promotions.
Due to the favorable timing of payments to vendors and promotional payments to carriers, we ended Q3 with cash and short-term investments of $592 million, roughly equal to our ending Q2 levels.
Looking ahead we entered the fourth quarter with higher than expected levels of channel inventory, and as I indicated, earlier carriers have deferred deliveries or reduced planned order quantities.
Given the level of sell-through volumes reported today and the shipments delivered late in Q3, we currently expect fourth quarter revenue to be less than $150 million. (Consensus is $305.77M)
We expect our Q4 operating expenses to be lowered than Q3 and more consistent with the level of spending in Q2. Given our Q4 revenue outlook along with the expected reductions in accrued liabilities and accounts payable during the quarter, we expect cash consumption to be higher in Q4 than our operating results might otherwise indicate.
(CEO) The long-term potential for our company also remains strong. We're making great progress on future new products in our software road map.
Carriers continue to have an active interest in Palm products, and we're looking forward to upcoming launches with new partners. Most importantly, we've built a unique and highly differentiated platform in webOS, which provides us with a considerable and growing advantage in the marketplace.
The full weight of that advantage has yet to emerge as the market is still young, and we have not yet been able to translate into commercial success, but the successful turnarounds I've been involved with give me confidence that with focus, execution and continued industry leading innovation we can achieve our goals.
(Q&A) Jon, you had mentioned that you're looking forward to additional launches with other carrier partners. Given that sort of the challenges that you have mentioned that you're currently facing with adoption of your products, can you give us the sense as to the tenor of those conversations and maybe perhaps some color as to whether or not those conversations have changed in light of recent events or how we should think about things from that perspective? (A)Well, we have no changes to our planned carrier launches at this point in time. Obviously, we've learned some things from the Verizon launch, which we are carrying forward to use with our future partners. And we're excited about the new launches that are coming.
Can you just talk first, how did you get into this situation and a) talk about in light of what you're going to do to change things? It sounds like you've had real trouble engaging the carrier retail outlet, and what are you going to do? Do you need to take on more high-level sales people who have experience in this? It really seems like there's been a big trouble with the carrier relationship overall? (A)Well, I would say actually that we have very good relationships with the carriers, and we do significant training in advance of the launch. We do train-the-trainer and then that's supposed to flow through in-store. It became clear to us shortly after the Verizon launch that our training efforts have been insufficient. And so we put our Brand Ambassador Program into place, and are aggressively out there now, directly in the stores, which Verizon has partnered with us to allow us to do. And we are training at the point of sales and moving from store to store. We're hitting hundreds a day and working directly with the sales reps right there in the channel. And we're going back to ensure that the retention is there as well. I think that in entering the market with Verizon, I think, that for many years, Verizon had been shipping other products, and then had recently gotten their newest products, which they'd spent extensive time invested in training for, and I just don't think our training was sufficient enough when we got off, and so we're aggressively moving to fix that right now.
You talked about going to stores and more aggressively training the stores and their representatives and giving them more knowledge and information, but yet your sales outlook is meaningfully disappointing. It seems like it so far these sales efforts and increased training you are not seeing traction for that. Maybe if you can help me understand, a) am I wrong on that because the outlook for Q4 just looks so disappointing? It looks like you're not seeing much of the benefit, and maybe the tail is longer from the training. And then b) can you help us understand are the people purchasing these products significantly mostly Palm users or attracting new users because it's maybe the problem is not attracting new users to the Palm platform, as opposed to helping current Centro and Treo users switch over to webOS? Thank you. (A) Let me take the first question, and Jon will take the second. I think in terms of the Q4 outlook for revenues, it just really reflects that we, together with our carrier partners, more optimistic about the sell-through than is actually taking place. So, we've got channel inventories that, as we said in the earlier comments, we need to work through and we are and will, but those - that inventory overhang obviously does affect near-term revenues and that's what you're seeing in Q4. We, as Jon said in his comments earlier, we are seeing progress booking with the field sales organizations with the carriers, and we do think we will be able to improve significantly over where we are. And - but near term, yeah, we do have a channel inventory problem that is affecting our revenue outlook. (A)And on the second question, I think, we're seeing a really good mix of both traditional Palm users upgrading to webOS and brand new users who've never been on our platform before.
First let me touch on cash burn. You were talking about greater cash burn than the model would possibly show next quarter. Can you give us a sense, is that last quarter you said it was going to be 80 million, can you give us a sense, are we talking 100 million in cash burn or more? And this quarter, you originally guided to an $80 million worth of cash burn, and basically had none. What items, besides the top-line, which is gross margin positive, so shouldn't have generated a cash burn, what items didn't happen that allowed you to save that money? And then I have a follow-up on pricing and the market. (A)Yeah, just - I guess in terms of the cash burn for Q4, we gave a lot background in terms of as best we can tell how Q4 will shape up, and so it's clear I think from that outlook, we will use cash in Q4. We want to clarify for everyone - to make sure that you factor in the fact that as you point out, we did not have cash burn in Q3. That's really a function of the timing of payments to vendors and carriers. That timing will reverse in Q4, and so, if you look at Q4, it should look beyond the operating results for Q4 in terms of cash burn, and include in there if some portion of the Q3 liabilities that will be paid in Q4.
So we should be looking - so, the working capital didn't reverse itself the way we'd thought it was going to, so we're going to get that $80 million of hit from working capital, whatever it was, plus the normal cash burn that would have come about with a $150 million quarter, so we could be looking at something north of 200 million, is that - cash burn? (A) Yeah, again, we're not giving specific guidance, I think, again the way to think about it is that some portion of the liabilities that we set up in Q3 will be paid in Q4, and so if you think about the liabilities in Q4, we talked about promotional incentives that we accrued, and we talked about an inventory where we had inventory commitments in excess of current forecast of demand where we took accrued liability there for those commitments. Those are examples of the source of liabilities that will be paid over time, some portion of them will be paid in Q3, some portion in future periods.
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