Competition, costs and delays add up to trouble for Palm

Published 9:05 pm Tuesday, December 18, 2007

SAN FRANCISCO — 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 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.”