Palm: Struggles Ahead

Slightly topping downgraded earnings estimates from Wall Street, Palm today announced first-quarter results that show the company struggling to keep up in the fiercely competitive market for rich-featured smartphone devices. While saying its smartphone growth was up 18 percent year-to-year, the company had its slowest sales growth in three years and delivered net income of $16.5 million, down from $18.2 million a year ago.

Faced with stiffening competition from rivals releasing lower-priced smartphones, including BlackBerry 's BlackBerry Pearl, the Motorola Inc. (NYSE: MOT) Q, and the E62 from Nokia Corp. (NYSE: NOK), Palm earlier this month reduced its preliminary earnings estimate by around $30 million. The company reported revenue up 4 percent to $355.8 million, slightly above Wall Street estimates. (See Going Pro(-sumer).)

Palm's stock, which had dropped by 15 percent in the three months ending Sept. 1, rose slightly in after-hours trading today.

"These results are the strongest indication yet that Palm Inc. has its hands full," says Carmi Levy, senior research analyst at Info-Tech Research Group , "as it fights to maintain its formerly dominant position in a market that's in a tremendous state of flux."

The company also said it would buy back up to $250 million of its own stock, saying it considers the share price undervalued.

While the new 700p and 700w Treos have proven popular with many enterprise customers in the United States, retail carrier sales have been slow. In addition, prices for the Treo have remained higher than the new models from other manufacturers -- a factor president and CEO Ed Colligan addressed in the conference call this afternoon announcing the quarterly results. (See Nokia, RIM & Moto: 'Prosumer' Trinity.)

"To address the aggressive competitive environment in the retail market, we've made pricing adjustments to our product line and will announce a new, lower-priced product in the very near future," said Colligan. (See Tracking the New Treos.)

On Sept. 12, at the CTIA convention in Los Angeles, Palm announced the release in Europe of the Treo 750v, which runs on Microsoft Corp.'s Windows Mobile 5.0 operating system. The 750v will be sold by Vodafone, which has not yet announced pricing, but is expected to retail for under $200. It will be the first Palm device to operate over Vodafone's advanced 3G/UMTS network.

The 750v is also expected to be expensive to produce, however, which means it may not help Palm's bottom line. "We believe the new product does little to alter the competitive landscape for Palm," Deutsche Bank analyst Jonathan Goldberg wrote in a research note after the launch.

Despite the high regard in which Palm products are held in the U.S. enterprise market, it's not clear that the company can match the flashy designs and consumer-friendly features that could define the future of the rapidly converging mobile-device market.

"Today's cell phone is tomorrow's smartphone," adds Levy, "and this is an area where Palm has traditionally lagged market giants Nokia and Motorola."

Palm also faces a dwindling lifespan for its Palm operating system, which is owned by a separate company, PalmSource -- a wildcard that Colligan essentially dismissed in his responses to questions from analysts today.

"The Palm operating system continues to get great reviews as the best solution on the market," Colligan said. "We have offerings on the two industry-standard platforms, Windows Mobile and the Palm OS. Our platform has stood the test of time, and we will continue to innovate on top of it."

"Continued innovation," in this market, may amount to standing pat in a game where the stakes are escalating rapidly.

— Richard Martin, Senior Editor, Unstrung

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