Palm struggles with succesful products, delays and repairs

Palm suffers financial losses, even after the success of its recently released Centro line of smart phones.


The company's shares plunged on Friday after it forecast a revenue shortfall and a loss for its fiscal second quarter. 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 $0.81 (£0.39) at $5.78 (£2.82) on Friday afternoon. As recently as October, they were trading at more than £7.

The Centro, smaller and less expensive than Palm's flagship Treo line of smart phones, 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 (£48) 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 personal digital assistants (PDAs) to phones and fighting far bigger competitors including Research in Motion, Motorola and Apple. In September, it cancelled 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 $345m to $350m in revenue for the quarter, down from the $370m to $380m 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 is not uncommon for a new handset to fail carrier certification, even if it does not 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."

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