Palm: Business Terrible Until The Pre Goes On Sale

Palm shares dove 11% after-hours after the smartphone maker said Q3 sales would come in more than 40% below Wall Street’s expectations.

The good news: Palm still expects to launch its Pre smartphone before the end of June. The Pre, launching at Sprint Nextel (S), is the first Palm phone based on its new WebOS platform — the future of the company.

The bad news: Palm (PALM) said it would report February quarter sales between $85 million and $90 million, severly below the Street’s $158 million consensus. Palm also expects “declining revenues and continued margin pressure from its legacy product lines in the fiscal fourth quarter,” which ends in May.

Further, Palm is running low on cash:

Palm stated that cash used in operations for the quarter is expected to be between $95 million and $100 million. The company’s cash, cash equivalents and short-term investments balance is expected to be between $215 million and $220 million at the end of the third quarter.

Although Palm believes it has sufficient cash, cash equivalents and short-term investments to meet its working capital needs under its current operating plan, the company intends to strengthen its working capital position given the challenging economic environment and the opportunity to drive both the launch of the Palm Pre and future product-development efforts. The company is currently evaluating options in this regard, including the exercise of its right to direct the remarketing of a portion of the common shares underlying the Series C preferred stock and warrant units owned by Elevation Partners. Palm is entitled to retain any net profits realised from such remarketing.

Like Apple’s (AAPL) iPhone, Palm says it will report Pre revenues over 24 months.

Palm will report third quarter results on March 19.

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