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Prey for the iPhone?

"You know the beautiful thing: June 29, 2009, is the two-year anniversary of the first shipment of the iPhone. Not one of those people will still be using an iPhone a month later."

— Roger McNamee, March 5, 2006, Bloomberg

Well what would you have expected him to say? "Gee, I think we have a really good product, too, but that Apple iPhone’s a really tough competitor"? (See Will iPhone Users Defect to Palm's Pre?)

Palm Inc. has since filed a "clarification" statement with the Securities and Exchange Commission (SEC) . In that filing the aforementioned claim is "withdrawn," but that’s akin to withdrawing the bullet after you have pulled the trigger.

Obviously, Mr. McNamee is not a casual observer in this adventure. To draw from the old fable about bacon and eggs, the hen was involved but the pig was committed. In this case Mr. McNamee, via Elevation Partners, is committed to the tune of $425 million.

When the marriage of Palm and Elevation took place back in the fall of 2007, I seriously doubt that the players anticipated the economic conditions that have plagued the handset market for the last six months of so. If your name hasn’t been iPhone or Storm, there have been some very serious headwinds, little to cheer about, and no sign of anything abating in the near-term.

Remember that the initial investment in Palm was $325 million in October 2007. As recently as last September, management was touting the significant improvement in operating performance (pro forma basis) in the just concluded August quarter from the period immediately preceding. Among the metrics being cited were the reduced operating loss; the cash position only fell by about $10 million; cash required by operations hit the mid-single digits; and inventories declined. The company didn’t provide specific guidance relative to its fiscal second quarter (November) but suggested that revenue would be down from the $366 million in its fiscal first quarter largely due to the maturing products representing the bulk of its portfolio.

And then the stuff hit the fan!

In terms of the aforementioned guidance, "down" wasn’t intended to mean "off-the-cliff," but that’s exactly what happened. On December 1, Palm announced that revenue would be in the $190 million to $191 million range, a far cry from the $331 million that street analysts were expecting. With that plunge, all the improving financial metrics were out the door and the company was into restructuring mode. Faced with horrendous market conditions, the launch of the Pre anticipated in several months, and the operations cash burn of up to $20 million in the November quarter, Palm needed another cash infusion quickly if it was going to make it to the finish line.

Elevation Partners had no choice but to add another $100 million to its investment. However, conditions only worsened as Palm’s pre-announcement on March 3 indicated. Not only was revenue expected to be down by another 50 percent sequentially, the cash burn rate accelerated by a factor of five times, as you can see in the graph below depicting metrics for the recent quarters.

Palm Performance Metrics Next Page: Enter the Pre

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