Highlights From PALM's Q4 Conference Call: CEO Sees Smartphone Penetration Doubling By 2013

Last night, Palm (Nasdaq: PALM) reported Q4 adj-loss of $0.40, versus the analyst estimate of ($0.62). Revenue for the quarter was $86.8 million, versus the consensus of $80.64 million. Investors are loving the news and shares are up over 15% today.

Highlights From PALM's Q4 Conference Call:

• Shipped 351,000 smartphones during the quarter, up 6% from last quarter.
  
• (CEO) We think the Palm Pre is by far the best product we've ever shipped, and I'm very happy with how we're managing the launch. We're successfully ramping supply to meet demand that is strong and growing.
  
• Our webOS updates have been seamlessly downloaded, two of them since launch, and the number of applications downloaded from the Palm App Catalog has grown from 150,000 at launch to over a million as of yesterday.
  
• Today, smartphone penetration is just 11% globally and 19% in the U.S., and these numbers are expected to almost double by 2013.
  
• We're eager to grant wider access to our SDK [software development kits], but we need to do so in a measured and methodical fashion, so we can be sure we're providing a great development experience and attentive developer support. Over the next few weeks, we expect the program to grow from
  hundreds to thousands of developers.
  
• My highest priority is very straightforward: execution.
  
• (CFO) Under subscription accounting, we are recognizing Palm Pre revenues and costs of revenues over the product's economic life. So while cash is due to Palm at the time of sale, we're recording deferred revenues and costs of revenues on our balance sheet for Palm Pre and then amortizing them into our operating results over 24 months.
  
• We announced Bell Mobility in Canada as our next carrier for the Palm Pre. We continue to see strong domestic and international carrier interest in the webOS platform, and we saw a nice ramp in Treo Pro sales after the product launched with Sprint.
  
• We narrowed our bottom line loss, reduced our use of cash, and delivered adjusted revenues of 113.2 million, a 25% increase over Q3.
  
• Adjusted smartphone revenues for the quarter were 110.5 million on shipments of 351,000 units, versus smartphone revenues of 77.5 million and shipments of 330,000 units in our February quarter.
  
• Smartphone sell-through during the May quarter was 460,000 units versus 482,000 units in Q3. The May quarter did not include Palm Pre sell-through, as Sprint did not begin selling this product until after our Q4 ended.
  
• Smartphone channel inventories decreased by 109,000 units during the quarter, primarily as a result of sell-through incentives for our Centro product line.
  
• Adjusted gross margin for the May quarter came in at 26.8% versus 5% in the February quarter.
  
• Looking ahead, as we build our portfolio of webOS products, we expect our gross margin on an adjusted basis will, over time, be above 30%.
  
• First, on a GAAP basis, we recorded 23.1 billion non-cash loss from derivative accounting related to our Series C Preferred Stock.
  
• On a GAAP basis, we also recorded $2.6 million charge in Q4 for restructuring actions we began in November, and we received insurance proceeds of 5.3 million related to a theft which occurred in our February quarter at one of our third-party warehouses.
  
• Going back to Q4 results, our adjusted net loss for Q4 was 53.4 million and a loss per share of $0.40. This compares to an adjusted net loss in Q3 of 94.7 million and a loss per share of $0.86.
  
• Turning to the balance sheet, Q4 inventory increased to 19.7 million from 15.3 million in Q3 as we built up supply levels for the Palm Pre launch.
  
• Accounts receivable at the end of the quarter were 66.5 million versus 52.7 million at the end of Q3.
  
• Cash used in operations in Q4 was 72.4 million. We continue to expect to use cash to at least the first half of fiscal year 2010, as we implement our product roadmap and continue our expansion.
  
• Looking ahead, we see the potential of turning cash flow positive in the second half of fiscal 2010.
  
• (Q&A) Are you willing to provide the number of Pres shipped in the quarter? And it looks like the Pre GMs preliminarily are fairly healthy: somewhere in the high 30s. Is that accurate, or are there any other adjustments we should take into account? (A) No, actually, we're going to continue with our past
  practice, which has been not to break out specific revenue or unit volumes for individual products.
  
• On just, Jon, you talked earlier about execution of software, in particular, for example, with the rollout of the way people are going to be able to access applications in your SDK. How do you see differentiating the user experience using Web 3.0 for things like that? (A) Well, one of our views is that as you get large numbers of applications, discovery and finding applications that are interesting to you becomes more and more difficult, and so we hope to use much of a community approach to solving that problem, and so, not to get into the specifics of what we're doing - you have to stay tuned for that - but we're pretty excited about the things we've got coming in this area.
  
• And do you think that will help stimulate the interest in the platform from a development point of view? (A) We have tremendous interest already. We've approached this very methodically, as I said. We started off with somewhere around 30 developers in the beginning and we got tremendous feedback from them. With their feedback we evolved the SDK and evolved the tool set, and then we let hundreds of developers into the program. And that's what we have going right now. We're feeling very good about it, and so we're about to open it up to thousands. We've got a lot of people in the queue, and so I don't think we've had a real issue as of yet with interest out there.
  
• And then can you talk about the exclusivity that you have with Sprint in the U.S.? Is that something that is all webOS devices, or is that just specifically for the Pre? And can you update us on when that may be over? We've had some comments from other carriers as to when they may launch the device, and I wondered if you could help us with that. (A) So, Sprint is our exclusive launch partner for the Pre. They're a great partner; they've done a phenomenal job with this launch. We're extremely happy. I personally went out to visit a bunch of the stores in the first week; the customer service was phenomenal. As you know, their data network is terrific, and by using Sprint you actually save a lot of money something on the order of $800,000 over a two-year period. So we couldn't be happier. As far as how long the exclusive goes, that's not something that we talk about.

Palm, Inc. provides mobile products for individual users and business customers worldwide.

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