Palm Inc.’s (PALM) first-quarter results beat consensus revenue estimates of $297.7 million and earnings estimate of a loss of 24 cents per share as the company’s shipment of the new Pre device was better than expected.

Although results exceeded consensus expectations, they declined from the year-ago level. Revenue on a GAAP basis for the quarter came in at $68.0 million, a sharp decline of 21.6% from the previous quarter and 81.5% from the year-ago quarter. Revenue declined mainly because Palm defers revenue from products that run its new WebOS operating system to later periods.

On a non-GAAP basis, adjusted revenue (excluding subscription accounting and stock based compensation) for the quarter was $360.7 million. Revenue performance in the quarter was positively impacted by the strong domestic and international carrier interest for Palm Pre such as Sprint (S) in the U.S. and Bell Mobility in Canada. The company also plans to launch Pre in Europe via its exclusive carrier, Telefonica (TEF).

The company posted a loss (for the ninth consecutive quarter) of 10 cents per share, excluding one-time items, which narrowed from 40 cents per share in the previous quarter and 12 cents per share in the year-ago quarter.

Gross margin on a non-GAAP basis increased to 27.9% in the quarter from 26.8% in the previous quarter and 26.6% in the year-ago quarter. This was due to better product mix. The company expects to achieve non-GAAP gross margin of 30.0% over time. Adjusted EBITDA for the quarter was -$2.0 million versus -$7.4 million in the year-ago period.

Better-than-Expected Smart Phone Shipment

Smartphone shipment of 823,000 units in the quarter was better than analysts’ expectations. While the company’s shipments were down 30% year-over-year, they were more than double (up 134%) the previous quarter. Smartphone sell-through during the quarter was 810,000 units, up 76% quarter-over-quarter but down 21% year-over-year.

Balance Sheet Disappoints

Palm exited the most recent quarter (first quarter of fiscal 2010) with $221.2 million in cash, investments (including short-term and restricted portion) and non-current auction rate securities versus $264.6 million in the previous quarter. The company used $45.1 million cash from operations. Palm expects to use cash in the first half of fiscal year 2010. Palm has a negative working capital (current assets minus current liabilities) of $269.5 million. Palm also has a negative book value of $740 million.

Second-Quarter Guidance Disappoints

Due to the timing and scale of expected product launches in Palm’s second fiscal quarter and lower than anticipated demand for legacy products, Palm expects non-GAAP adjusted revenue for its second quarter to be in the $240 – $270 million range, much below the consensus estimate of $344.4 million. According to the Zacks Consensus Estimate, PALM is expected to report a 37-cent loss in fiscal 2010, which is a decline from the previous forecast.

Despite the launch of a new product (lighter and cheaper handset called the Pixi) and the coming holiday season, Palm’s second quarter revenue guidance was of a sequential decline which is not a good sign.

We believe Palm will continue to struggle as it competes against much larger competitors such as Apple Inc. (AAPL), Research In Motion (RIMM) and Nokia Corp. (NOK). With weak fundamentals, our confidence in the company’s long term prospects is low. Therefore, we reiterate our underperform rating on the stock.
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