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Falling Stocks

While it was Jon Rubinstein’s job to play Palm’s Chief Optimism Officer as well as CEO during yesterday’s financial conference call, analysts and investors alike have picked apart his and CFO Doug Jefferies' comments and don’t like some of what was said. In fact, investors liked it so little that the stock opened Friday trading down more than 10% from Thursday’s pre-conference call close of $11.72. From the opening bell investors never looked back, with Palm closing today’s trading down a stunning 13%. Today marked the first time in nearly eight months since Palm’s share price dropped below $10, though it ended the day at $10.17, a drop of 44% from its 52-week high of $18.09 at the end of September. At one point during the day Palm traded as low as $9.60.

So what drove investors to so desperately sell stock in Palm that they were willing to lob off an eighth of their asking price? Panic. Notably, panic driven by reading into the comments made by Rubinstein and Jefferies. Take this for example:

“We’ve dramatically ramped our TV advertising and online campaign for Pixi throughout the holiday season. Our recent PR activity has been outstanding and as Jon mentioned, we’ll be launching a new broad based Palm marketing campaign later this quarter. We think these combined efforts, among others, will help drive increasing momentum as the year unfolds.”

Palm is doing the advertising here, not the carriers. With the exception of Apple’s iPhone ads, most manufacturers have been content to let the carrier handle the advertising. The fact that Palm is picking up a large portion of the advertising budget for the Pixi (how many Sprint Pixi ads have you seen?) indicates that Sprint’s support for the phone is relatively low. Considering that Pre sales were clearly disappointing to Sprint, it’s little surprise that they aren’t going all-in promoting the Pixi. Palm’s advertising expenditures for the last quarter were up $18 million.

And of course there’s the continued losing of money. It’s little surprise that Palm continues to hemorrhage cash, at least if you look at it from GAAP accounting numbers. GAAP requires that smartphone manufacturers who provide significant services for the device (e.g. updates, app stores, music sales, etc) defer the revenue from the device over the expected lifetime of the device. In Palm’s case, that means they need to take the money taken in from Pre and Pixi sales and split it up over two years, even though they have and can spend the money from the sales right now.

So while Palm shipped more phones than expected, they also spend more money than was expected, reporting a loss of $0.37/share, as opposed to analysts consensus estimates of a $0.32/share loss. That equals a loss of $60 million, as compared to a loss of $14 million last quarter. Even with the losses, Palm has cash and short-term-investments totaling $590 million, an increase from $378 million at the start of the quarter. A good portion of the cash gain came from the $500 million secondary stock offering, of which it seems a good portion has already been spent.

Moving forward, Palm’s numbers will comparatively be different, as GAAP accounting practices have changed to place more of the revenue from smartphone sales at the time of sale, though a portion will still be deferred over the life of the device.

Jefferies also said that the coming quarter (ending in February 2010) may not be all roses either, as Palm plans to “invest aggressively to support [their] expanding business.” Palm also expects to meet revenue goals of $1.6-$1.8 billion in 2010, though those numbers are contingent upon strong execution from carriers, which is translated to mean competitive subsidization pricing and expanded advertising. If Palm can reach these sales goals they expect to achieve both positive cash flow and profitability by the end of the year.

More troubling to Palm investors, however, may have been the Research in Motion fiscal results, released at the same time as Palm’s. While Palm did show a marked improvement from this quarter last year, RIM surged ahead more than most analysts expected. RIM was able to dramatically expand their international sales outside of their home markets of Canada and the United States. They also enjoyed a revenue increase of 59% and shipped 10.1 million handsets, which is 500,000 more than analysts expected. RIM also forecasted increased sales and revenue in the coming year, painting a far rosier picture than Palm. As a result, shares of RIMM ended the day up more than 10%.

What we have here is the tale of two companies. Both were expected to deliver results that were on par with analyst expectations, which themselves were not that high. Both exceeded, but only one blew the numbers out of the water. The continued success of RIM and Apple seems to indicate that smartphone sales are immune to the current global economic climate, and that Palm’s continued comparative floundering is the exception, not the norm.

Do we expect Palm to do better in the future? Yes, but unlike RIM and Apple, Palm is going to need major support from their carrier partners to get it done.