Treo Delay Hits Palm Earnings

As expected, Palm Inc. said today that its quarterly earnings were dragged down by the delay in shipping in the U.S. of its new Treo 750 device. Reporting shortly after the markets closed, Palm said its earnings hit $17.6 million, or 17 cents per share, on revenue of $392.9 million, down 12 percent from the same period last year. The results were slightly above analysts' estimates, which were slashed last month when the maker of smartphones and PDAs said the certification of the Treo 750 would be delayed into early 2007.

The delay in the release of the new 750 adds to a list of woes that are weighing down Palm's prospects for future growth. Threatened, on the one side, by the continued dominance of Research In Motion Ltd. (RIM) (Nasdaq: RIMM; Toronto: RIM), which in September released a consumer-oriented, lower-priced version of the BlackBerry, the Pearl, and on the other by the rise of free email service from Microsoft Corp. (Nasdaq: MSFT), Palm looks like what Todd Kort, principal wireless analyst for Gartner Inc. , calls "an increasingly moribund company that is mostly living off the goodwill engendered as a result of their pioneering efforts in the PDA and smartphone businesses." (See It's Not Easy Being Palm.)

The delay in shipping of the new Treo -- which, admittedly, looks a lot like the "old" Treo 600 except without an external antenna -- is a bit of a double-edged sword considering that the revenue will now start to show up in the next quarter (the third quarter of Palm's fiscal year 2007).

Palm, however, faces larger challenges, beginning with its antiquated operating system. Last month the company paid Japanese software maker Access, formerly palmSource, $44 million for perpetual rights to the Palm OS (which had been spun out from Palm in a revenue-generating move in Oct. 2003). Many in the smartphone business, however, see the Palm OS -- last updated a few years ago -- as several generations behind those from Microsoft and Symbian Ltd. , not to mention RIM's proprietary platform. (See Palm Gets Its OS Back.)

"I think you'll see us investing significantly in the software parts of our product," said CEO Ed Colligan in a conference call discussing the results. "We plan to continue to enhance the Palm OS products and build on top of and around that platform."

Analysts are less sanguine.

"I do not think there are any significant enhancements Palm can make to this antiquated architecture that will bring it back to health," remarks Kort. "They may patch it and milk it for all its worth, but there really is no saving Palm OS. It is dying."

That leaves Palm with few good options -- pour money into rejiggering an obsolete OS, become a vendor of hardware running the Microsoft and Symbian systems, dump the Palm OS and go with the open-source Mobile Linux platform, or sell itself off. The first option would leave the Treo with a narrowing niche market, the second would likely not boost the bottom line until late 2007 or 2008, and the third would mean the end of Palm as an independent company. None are particularly attractive to Colligan and the Palm board.

Treo shipments in calendar 2006 will likely total about 2.3 million units, up roughly 15 percent from 2005, while the overall smartphone market will climb by about 50 percent this year to roughly 74 million units. In a burgeoning market, Palm -- which pioneered the PDA and smartphone when they were niche devices for geeks and CXO-level executives -- increasingly looks like yesterday's news.

Palm's share price, which has dropped by almost 40 percent in the last eight months, closed at $13.70, down 2.14 percent on the day.

— Richard Martin, Senior Editor, Unstrung