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The True Meaning of Palm's Guidance Report: We're Screwed!

Just two weeks ago, we heard that Palm (PALM) was halting production of its handsets. According to some observers, it was nothing more than a temporary slowdown for Chinese New Years and an inventory "adjustment." How did they know? That's what Palm said. I asked whether the company was stopping production to complete an acquisition, or if it is just sinking fast. Given the news Palm released this morning, my question still stands.

Palm lowered its guidance for the third quarter of its fiscal year 2010 and expected "2010 revenues to be well below its previously forecasted range of $1.6 billion to $1.8 billion."

It was clear a fortnight ago that Palm was in trouble. Consumer electronics companies -- at least ones well-run -- update production on a regular basis. The idea of suddenly shutting down production for a couple of weeks to balance inventory is unthinkable. By the time such a severe correction is necessary, the business has significant problems. The statement from Palm was the usual corporate waffling in the face of disaster:

"Palm webOS is recognized as a groundbreaking platform that enables one of the best smartphone experiences available today, and our work to evolve the platform and bring industry-leading technology to market continues. However, driving broad consumer adoption of Palm products is taking longer than we anticipated," said Jon Rubinstein, chairman and chief executive officer. "Our carrier partners remain committed, and we are working closely with them to increase awareness and drive sales of our differentiated Palm products."
Palm does offer a very good smartphone experience ... except, as we saw a few days ago in smartphone operating system market share numbers, so does Symbian, RIM (RIMM), Apple (AAPL), Microsoft, and Google, as well as various forms of Linux. That doesn't count new operating systems from Microsoft and the team of Intel (INTC) and Nokia (NOK).

Although high tech firms often try to manage expectations so they can appear to burst through analyst predictions, Palm's guidance announcement is actually dreary. The note that the company would finish the third quarter "with a cash, cash equivalents and short-term investments balance in excess of $500 million," suggests the rate at which it might be burning through cash. Palm finished last quarter with about $590 million. That was up from about $255 million six months before, but the increase includes the results of the business sales season. Back in 2007, Elevation Partners invested $325 million in Palm, but given how things are going after rolling out its savior product, who will want to put more cash, if necessary, into the concern?

I suspect Palm executives are busy scouring the landscape, hoping for a potential acquisition. Any Prince Charming would have to be interested in the handset business. Considering where most of that industry stands, I'd say it would come down to either Microsoft or Google -- two companies with operating systems that have displayed interest in having their own branded handsets. However, why buy Palm? They both have manufacturing partners and would have no use for Palm's webOS. Over the next 12 months, Palm's future could actually look more dismal than Sun's, before Oracle (ORCL) finally decided to pick it up.