Palm's financial slide continues despite smartphone gains

Palm posted a net loss of US$840,000 for its first quarter.

Palm hasn't yet managed to turn around its declining fortunes, posting a quarterly net loss of US$840,000 on Monday.

The loss compares to net income of US$16.5 million for the same period last year.

The results for the first quarter ending August 31 continue a rough patch for Palm, which is posting gains in smartphone sales that don't seem to make up for the downturn in demand for PDAs (personal digital assistants), Palm's traditional mainstay.

Palm sold 689,000 smartphones during the quarter, up 21 percent compared to last year. Smartphone revenue was US$302 million, a 12 percent increase over last year. Sales of Palm PDAs, which now make up 16 percent of its business, declined by 33 percent in the period.

Overall revenue for the period was US$360.8 million, up from US$355.7 million in the same quarter last year.

Analysts polled by Thomson Financial expected slightly worse news. The consensus from Thomson was earnings per share of US$0.08 and Palm posted one cent better, with earnings per share, on a non-GAAP basis excluding one-time charges, of US$0.09. That compares to US$0.21 cents, on a non-GAAP basis, for the same period last year.

Last week Palm introduced a smartphone brand aimed at enticing traditional low-end phone users to upgrade into the smartphone category. That introduction followed an announcement that the company wouldn't roll out a smartphone companion project that was heavily criticized in the market.

Palm warned that the low-end Centro will drive down its average selling price in the future but said it hopes it can make up for that with higher volumes. That's one reason Gartner analyst Todd Kort is cautiously hopeful about the impact of the Centro. "A lot depends on how well they market this product to increase the unit volume, to compensate for what it might take away from their higher end brands," he said. "I happen to think it's a reasonably good-looking product, but Palm is still sort of playing catch-up." The Centro is thinner and lighter than Palm's Treo smartphones, following a trend started quite a while ago by Motorola with the Razr.

Kort is even more hopeful that a new Palm product that could come out next year might turn out to be an "interesting breakthrough-type product." Jon Rubenstein, a former Apple Inc. engineer who is credited with contributing to the design of the original iPod, recently joined Palm's board. Kort and others speculate that he might be instrumental in the development of a new Palm product that could make a big splash in the market.

Palm needs that because it's basically "treading water," Kort noted. Even though Palm is recording approximately 20 percent increases in smartphone volumes, the rest of the market is growing by closer to 50 percent, he said. That means Palm continues to lose market share.

In addition to the Centro, Palm has other plans for improving its position. Its development team is now fully focused on its new software platform, which will be based on Linux and is expected to debut at the end of next year, the company said.

The company is also focusing on enterprise e-mail, in close partnership with Microsoft, said Ed Colligan, president and CEO of Palm, during a conference call to discuss the earnings. In a clear jab at competitor Research in Motion, he said companies will become more reluctant to buy and support specialized servers for mobile e-mail. "We believe that the days where a CIO feels the need to install a third-party server to deliver secure and reliable e-mail are quickly coming to an end," Colligan said. IT administrators must use a server from RIM in order to push e-mail out to BlackBerry users. Users of Microsoft Exchange can push e-mail out to users of phones running Windows Mobile or Palm operating system without an additional server.

He said to expect a number of new Windows Mobile products from Palm next year, in both the US and Europe.

No conversation about smartphones these days can pass without comparisons to Apple's iPhone and Palm's earnings conference call was no exception. Palm saw very little change in sales volumes, even from AT&T which is the exclusive seller of the iPhone, after the iPhone hit the market, Colligan said. "I'm sure it's had some impact, but not anything that's significant," he said.

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