Palm Profits, Revenues Drop Sharply in Third Quarter

SAN JOSE, Calif. – Palm Inc. (PALM) faces challenges not only to compete with a growing number of rivals in the smart phone market but also to drum up investor excitement.

The maker of Treo smart phones reported Tuesday a sharp drop in its fiscal second-quarter profits and revenues, though the results beat Wall Street analysts' lowered projections. Its third-quarter forecast fell short of expectations.

Shares of Palm dropped to a new 52-week low of $13.41 before rebounding to close at $13.70, down 30 cents, on the Nasdaq Stock Market. Following the quarterly report, they fell 9 cents in after-hours trading.

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The onslaught of new competition and a product delay helped drag Palm's stock in past weeks as well as hurt earnings.

The Sunnyvale-based company said profit was $12.8 million, or 12 cents per share, in the quarter ended Dec. 1. That compared with earnings of $260.9 million, or $2.51 per share, in the year-ago period, which included a tax-related gain of $226.3 million.

Excluding stock-based compensation and one-time items, Palm said it would have earned $17.6 million, or 17 cents per share.

Revenue fell nearly 12 percent to $392.9 million, compared with $444.6 million in the year-ago period.

Citing the delay in the U.S. launch of one of its new Treos, Palm had already lowered its targets in November to 10 cents to 11 cents per share on revenue of $390 million to $395 million, from an earlier projection of earnings of 15 cents to 18 cents per share on revenue of $430 million to $450 million.

Analysts, on average, pegged their latest expectations at earnings of 15 cents a share on revenue of $392.3 million, excluding stock-based compensation and one-time items, according to Thomson Financial.

Palm officials said the delay of the Treo 750 was caused by certification issues with carriers, some of which were outside of Palm's control.

But Palm Chief Executive Ed Colligan acknowledged in a conference call with analysts that Palm didn't deliver the product as it had hoped, while rivals introduced an unprecedented number of new smart phones during the period.

"No excuses there," Colligan said. "We have to do better and we have to hit those dates."

The Treo 750 launch for U.S. customers remains on track to occur in the current quarter, he said, and is expected to boost sales. That smart phone model, based on Microsoft Corp.'s (MSFT) Windows Mobile operating system, first became available in Europe in September.

Unit sales of Palm's expanded Treo lineup, however, did grow in the second quarter to a record high of 617,000, up 42 percent from the number of units a year ago, the company said.

"We've got good momentum, and we won't let up on our efforts to expand globally," Colligan said.

As deep-pocketed rivals like Motorola Corp. (MOT), Nokia Corp. (NOK) and Samsung Electronics Co. entered the smart phone market during 2006, Palm increased its number of smart phone models from one to four.

The latest model, the Treo 680, introduced in November, is aimed to be more affordable and appealing to mainstream consumers — the same target market as Motorola's Q, Research in Motion Ltd.'s (RIMM) BlackBerry Pearl, and numerous others.

With stiffening competition as well as increased costs in marketing, litigation, and research and development, Palm issued a soft forecast.

For the third fiscal quarter, Palm said it expects revenue to be in the range of $400 million to $410 million, with earnings between 8 cents and 10 cents a share, or between 11 cents and 13 cents on an adjusted basis.

Analysts were expecting revenue of $416.6 million and adjusted earnings of 16 cents a share, according to Thomson Financial.