Palm Shares Hit by Revised Earnings Outlook

Shares of Palm dropped sharply Tuesday after the hand-held device maker said its quarterly revenue would come in well below earlier expectations.

Sunnyvale, Calif.-based Palm said it now expects revenue of US$390 million to $395 million for its second quarter, which ends later this week. That is compared to earlier guidance, issued in late September, of $430 million to $450 million. Profit is also expected to be well below earlier targets.

Next-Gen Treo

Palm said the shortfall is attributed mainly to delays in the final certification process for the next-generation of its Treo hand-held, which had been expected to launch during the quarter. Certification is done by wireless network carriers before endorsing a device for use on their networks.

“Smartphone sell-through across our existing products is strong, reflecting solid business fundamentals in the face of significant competitive pressure,” said Palm CEO and President Ed Colligan. “However, our Q2 FY07 revenue will be constrained by a delay in certification of a key product.”

Colligan said the Treo 750 will now hit the U.S. market early in its third quarter, probably not in time to take advantage of the fourth-quarter holiday buying season. The company said the earlier launch of the 750v in Europe has resulted in strong demand. “We expect international revenue for the second quarter to be strong,” said Colligan.

The Treo 750 runs on Microsoft’s Windows Mobile operating system, which gives the device more capability than some competing models as well as compatibility with many corporate networks, where Microsoft’s platform and productivity applications are ubiquitous.

Deadly Delays?

Palm shares were down 7 percent in morning trading Tuesday on the news, to $14.34. Many analysts said the company faces a difficult competitive environment as it squares off against the BlackBerry from Research In Motion, the Motorola Q and other devices with similar smartphone functionality.

RIM shares moved higher at the same time, suggesting that the Treo delays benefit that company the most.

In fact, even modest delays can be costly as the market for smartphones and all-in-one hand-helds matures. RIM recently launched its next-generation Pearl device on schedule.

Unlike RIM, Palm is a device-only maker — the company split apart from the Palm operating system unit several years ago — which also adds a layer of complexity to the production and certification process.

Palm is hoping that the 750 and companion Palm 680 model — which uses the Palm operating system — will provide a significant revenue boost in the coming year. The Palm 680 launched last week on schedule and is already being offered by Cingular.

With a retail price tag of $199 and a bundle of business, messaging and entertainment software, the 680 is aimed at the lower end of the smartphone market.

Where the Growth Is

Getting products to market on time is key because many consumers are upgrading to smartphones when their plans expire. Market research firm In-Stat predicts that within four years, 25 percent of all wireless handsets worldwide will be multi-function devices capable of receiving e-mail and performing other tasks.

Also being closely watched is the mobile operating system battle, with Microsoft hoping that its strong presence inside enterprises can give it a leg up as it tries to propagate Windows Mobile. Despite strong growth for the BlackBerry and other devices, most businesses still have not established a formal mobile e-mail policy, according to Endpoint Technologies founder and President Roger Kay.

“The market is still very early in its evolution,” Kay said. “There are a lot of twists and turns to come as the mobile computing market matures.”

Recent financial reports suggest a dichotomy in the wireless world, with carriers turning out strong performance and mobile phone and device makers having a harder time growing profits, explained independent telecom analyst Jeff Kagan.

“Consumers have shown a taste for less-expensive handsets — with all the bells and whistles, of course,” Kagan told the E-Commerce Times. Add in the fierce competition among Nokia, Motorola, Palm and others and the stage is set for a battle to offer affordable but loaded phones. “That could mean higher sales but lower profits for those companies,” he added.

Nokia joined Palm in cutting its outlook on Tuesday, with that device maker also making negative comments about 2007.