Palm Drops 15% After Hours on 'Very Disappointing' Results

Palm (PALM), the struggling smart-phone maker, reported revenue that beat Wall Street's low expectations and a smaller loss than a year ago, but the company said its products are still failing to take off. The lackluster results are further evidence that the one-time mobile pioneer is getting creamed by rivals and could become a takeover target.

After rising more than 5% ahead of the report, Palm shares traded down as much as 15% after hours. At 6:29 p.m. they were down 13% to $4.89.

Palm's report suggests that the company's flagship phones -- the Pre and Pixi -- are being passed up by consumers amid fierce competition in the smart-phone market, as Apple's iPhone, RIM's BlackBerry, and Google's Android-based phones, particularly Motorola's Droid, have shown robust sales.

'Very Disappointing'

"Our recent underperformance has been very disappointing, but the potential for Palm remains strong," Jon Rubinstein, Palm's CEO, said in a statement. "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," Rubinstein said.

Palm's results had been expected. Last month, Palm said its 2010 sales would be "well below" the $1.6 billion to $1.8 billion the company had previously forecast. For the most recent quarter, Palm, which makes the Pre and Pixi devices, reported a loss of $18.5 million, compared with a loss of $95 million a year earlier.

Analysts polled by Thomson Reuters had expected the company to lose 42 cents a share, excluding certain items; the reported loss was 62 cents a share. Still, losses narrowed from the same period a year earlier, when the firm lost 86 cents a share. On the bright side, Palm's overall revenue of $366 million topped Wall Street expectations of $316 million.

Weak Sell-Through

Palm said it shipped 960,000 smart-phones last quarter, beating the Wall Street estimate of 845,000. But more importantly, the company said it sold only 408,000 units last quarter, down 29% from the previous quarter and down 15 percent from a year earlier. Wall Street analysts had been expecting Palm to sell between 500,000 and 600,000 units.

"We're disappointed in our sell-through and we're working aggressively to correct that," Rubinstein said on a conference call with analysts.

The stark difference between units shipped and units sold (sell-through) indicates that Palm devices are staying on store shelves longer as consumers choose alternatives from the likes of Apple (AAPL), Research in Motion (RIMM), and Motorola (MOT). "We have seen much lower-than-expected demand for Pre and Pixi products," said Doug Jeffries, Palm's CFO.