Delay, Repairs, Even Success Hit Palm's Profit

Struggling smartphone maker Palm can't win for losing.

The company's shares plunged last week after it forecast a revenue shortfall and a loss for its fiscal second quarter ended Nov. 30. Even the success of its newly introduced Centro hurt its financial results, Palm said in a news release.

Palm shares (PALM) on the Nasdaq were down US$0.81 at $5.78 on Friday afternoon. As recently as October, they were trading at more than $15.

The Centro, smaller and less expensive than Palm's flagship Treo line of smartphones, shipped in higher than expected numbers in its first quarter on the market, Palm said. But because of its low price -- it's currently offered by Sprint Nextel for $99 with a two-year contract -- those big shipments contributed to a lower-than-expected gross margin.

However, the biggest black eye in the preliminary financial report was a delay in shipping an unidentified future product that was expected to be certified within the quarter, Palm said. It's just the latest product setback for the company, which is making the transition from PDAs (personal digital assistants) to phones and fighting far bigger competitors including Research in Motion, Motorola and Apple. In September, it canceled the Foleo, a much-hyped accessory for the Treo, just days after offering assurances it was still coming.

An unforeseen increase in warranty repair expenses also hurt Palm's margin, the company said.

Based on its preliminary numbers, the company expects $345 million to $350 million in revenue for the quarter, down from the $370 million to $380 million it predicted when it reported results for its previous quarter on Oct. 1. It also expects a loss of $0.22 to $0.24, compared with a loss between $0.01 and $0.03 forecast earlier. Full results will be announced Dec. 18.

It's not uncommon for a new handset to fail carrier certification, even if it doesn't have major technical flaws, but Palm has deeper problems than most device vendors, according to Avi Greengart of Current Analysis. The bulky Treo platform is aging and even Palm's vaunted developer support is in doubt as OSes such as Windows Mobile and Symbian build up big installed bases, he said.

There are still applications for Palm OS that you can't get on any other mobile platform, but the company's blunders and delays of its promised Linux-based OS are taking their toll, he said. By the time the Linux platform hits the market, late next year or after, it will be up against systems based on Google's Android, he pointed out.

"The PalmOS developer community is considering its options," Greengart said. "The future Palm Linux OS is not a slam dunk."

For comprehensive coverage of the Android ecosystem, visit Greenbot.com.

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