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Palm swings to loss in 2Q as competition heightens, shipping delays mount
[December 18, 2007]

Palm swings to loss in 2Q as competition heightens, shipping delays mount

By RACHEL KONRAD AP Technology Writer
The Associated Press

Palm Inc. swung to a loss in the fiscal second quarter amid withering competition from consumer electronics rivals, troublesome warranty costs and delays in shipping its products to consumers.

The maker of the Treo smart-phone said Tuesday it lost $9.63 million, or 9 cents per share, on revenue of $349.63 million in the three months ended Nov. 30.

In the year-ago period, Palm earned $12.77 million, or 12 cents per share, on revenue of $392.91 million.

Excluding one-time items such as stock-based compensation expenses and nearly $1 million in restructuring charges, the Sunnyvale-based company said it would have lost $7.84 million, or 7 cents per share.

On that basis, which does not comply with generally accepted accounting principles, analysts polled by Thomson (News - Alert) Financial expected the company to lose even more -- $8.5 million, or 8 cents per share -- on sales of $350.29 million.

Palm said it expected to lose $30 million to $33 million, or 31 to 33 cents per share, on revenue of $310 million to $320 million in the current quarter. On an adjusted basis, it expects to lose $7 million to $10 million, or 14 to 16 cents per share.

Palm stock closed Tuesday at $5.93, up 28 cents or 5 percent before the release. After the quarterly report came out, it lost 59 cents in extended trading.

Palm's fiscal second-quarter loss capped a half-year of executive churn and disappointments at Sunnyvale-based Palm. Last quarter Palm finalized a recapitalization plan, began selling a lower-priced smart phone and canceled the release of a mobile companion product.


In the first fiscal quarter, Palm lost $841,000, or a penny per share, on revenue that rose 1 percent to $360.8 million. In the year-earlier period, Palm earned $16.5 million on revenue of $355.8 million.

"It's a transformational time so things could be a bit lumpy, but we'll do our best to manage through that," Palm President and CEO Ed Colligan acknowledged in a conference call Tuesday. "Ultimately we have to deliver and retake the mantle of leadership for design and execution."

Earlier this month, executives lowered forecasts for the quarter, blaming problems on unspecified and unexpected warranty repair costs. They also cited higher-than-expected shipments of its low-priced Centro smart phone, which reduced profit margins.

On Tuesday, executives complained generally of shipping delays -- a problem for at least the past two quarters and the source of numerous questions from clearly frustrated analysts, some of whom are demanding significant management changes.

"I've been very negative about Palm -- but today's report stunned even me," said Pablo Perez-Fernandez, senior wireless analyst at Global Crown Capital. "Palm has been missing deadlines for quite some time. It's disappointing but not unexpected.... This is a company with a limited product line, and if any one doesn't make it on time they're in trouble."

At times during the conference call Tuesday, Colligan seemed contrite.

"The problems should be resolved by now," he responded when an analyst asked if they would affect the current quarter. "I'm as disappointed as you are."

The smart-phone pioneer has faced toughening competition -- most notably from Cupertino-based Apple (News - Alert) Inc., which began selling its iPhone in late June.

In October, the company completed a deal to sell a 27 percent stake of to private equity firm Elevation Partners and pay a special $9-per-share dividend to shareholders.

The deal brought in a former Apple senior vice president of hardware engineering, Jonathan Rubinstein, as chairman. It also added Elevation Partners' Fred Anderson and Roger McNamee to Palm's board, replacing Eric Benhamou and Bruce Dunlevie.

In September, Palm debuted a slimmer, lighter, cheaper smart phone, the Centro. The new model became available in October through Sprint Nextel (News - Alert) Corp. for $100 with a two-year service plan and is expected to be available soon from other carriers as well.

Palm said Tuesday that smart phone revenue totaled $282.4 million last quarter.

Palm decided not to release its Foleo mobile companion product last quarter, and executives said they would instead concentrate on a next-generation platform and smart phones. The company said it plans to make a version of the Foleo that is based on the next-generation platform instead.

Analysts said last quarter was so tumultuous that they're looking to the fiscal third-quarter to determine whether Palm is back on track.

"Much hinges on the timeline for introduction of the next generation platform and products and whether Elevation Partners can push Palm back to a leadership position in the rapidly evolving mobile computing market," JP Morgan (News - Alert) analyst Paul Coster wrote in an investor note.

Coster anticipated solid quarter-over-quarter growth in Palm's fiscal third quarter but thinks the company could experience a seasonal slowdown going into its fourth quarter.

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