Analysts say the handheld maker may have to burn through half its ready cash reserves to make up for a massive US$200m stockpile of inventory.
Morgan Stanley analyst Gillian Munson said in a research note that the US$200 million in inventory expected to accumulate this quarter, and a projected US$80 million to US$85 million operating loss, threaten to halve the company's US$595 million in unrestricted cash.
Munson projects Palm could burn through even more money this year before its fortunes improve.
The company has US$238 million in restricted cash serving as collateral for the company's planned new headquarters, although Palm executives say the company is looking for ways to gain access to some of that money.
Palm warned in its quarterly earnings conference call last month that it overestimated demand for its devices. As a result, Palm said, it expects to post a loss in the current quarter and could see its inventory swell by US$200 million.
"We're working hard to minimise the cash impact," Palm Chief Financial Officer Judy Bruner said.
The company said last month it will cut 10 to 15 percent of its staff and will delay its planned move to a new headquarters. Bruner added that the company is looking at ways of gaining access to the restricted cash that has secured the financing for the campus.
Although Palm is working hard to cut through its inventory, the backlog comes just as Palm is introducing two new high-end models.
The m500 and m505 have been given high marks, but analysts have criticized the fact that Palm leaked details of the units months in advance of their release. Some analysts say the early announcement is a factor in the slow demand for existing Palm models.
Munson noted that two-thirds of Palm's inventory is in already-manufactured handhelds and that many of the components in inventory are customized for a particular product.
"This is a very serious situation, the kind that can get technology companies way off course," Munson said.
