Palm CEO: ‘We’re working on it’

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Palm CEO: ‘We’re working on it’
Colligan promises ‘breakthrough’ products




By Phil Carson
Story posted: December 19, 2007 - 1:53 pm EDT

Palm Inc.’s fiscal second-quarter results and its outlook for the next quarter, announced yesterday, took its stock down nearly 10%, to the lowest point in four years. The smartphone company reported a net loss of $9.6 million on modest revenue.

The company’s revenue reached $349.6 million, at the high end of recently revised guidance. Device sales volumes reached about 770,000, below Wall Street estimates. But an average selling price (ASP) of $359 met estimates.

The company’s guidance for the next quarter, however, held even greater disappointment for investors. Fiscal third-quarter 2008, which ends in February, should see revenue of $310 million to $320 million, according to Palm. That’s far below Wall Street consensus of $358 million, according to analyst Maynard Um at UBS Equity Research, whose own forecast is for $340.5 million.

Renewed focus

Still, Palm CEO Ed Colligan and CFO Andy Brown said that cost-cutting measures, a renewed focus on fewer products and work on a new operating system continued apace and would allow the company to release new products running the new OS in 2008.

Colligan said there was “no acceptable excuse” for the firm’s Treo 755p device missing its debut at Verizon Wireless early in the fourth quarter. He reiterated that reported problems with network testing at Verizon had led to what turned out to be an unnecessary delay. He also touted the strong sales of the Centro device at Sprint Nextel Corp., while warning that Palm faced possible component shortages for the device.

Colligan, known for his frankness, insisted that Palm could turn itself around in the coming year and that a streamlined company better focused on next-generation products would succeed.

“We’re working on it,” Colligan said several times in the conference call, to cap a point on Palm’s direction.

Analysts were skeptical.

Meaningful risks

“We remain cautious on (Palm’s) outlook, given a lack of visibility to differentiated products, increasing competition … and aggressive pricing actions,” wrote Um in a note to investors. “Although the new OS may help on costs and platform (work), we believe there are meaningful risks.”

Those risks include an initially small development community and limited new applications for new Palm devices and the OS certification process on tier-one networks, with the possibility of delays, Um wrote.

In September, however, analyst Tero Kuittinen at Avian Securities LLC, said that the Centro—which he called “a kooky, fun $99 smartphone”—“just might be a big hit for a company that could be transformed by one hit.”

That optimism about Palm’s shrinking opportunities seemed to be reflected in Colligan’s demeanor on the company’s conference call with analysts yesterday. The CEO knows the competitive window for a turnaround is closing and he’s obviously betting that Palm, with an infusion of private equity ($350 million in June from Elevation Partners), access to new debt ($400 million in June) and job cuts (100 more across the board in the past two weeks) has a shot at reversing its decline.

A year ago in August, according to ABI Research data, Palm and Research In Motion Ltd. both had 33% of the U.S. smartphone market. By this past August Palm had slid to 24%, while RIM grew to 44%. Palm’s slide has been attributed to an antiquated OS and Treo form factors that have failed to keep pace with competition.

’Breakthrough’ products

Colligan said Palm was “done with adjustments” to existing products—presumably the Treo line—and henceforth was focused on “breakthrough” products and its new, Linux-based OS.

“We’re not stopping short of revolutionary designs,” the CEO said.

Asked if Palm would focus narrowly on the low-end of the smartphone pricing tier—its popular Centro device sells at $100—Colligan said the company would continue to ply the market for $100 to $250 devices, with some deserving of “premium pricing.”

What features could be added that would differentiate Palm’s new products?

Wi-Fi, GPS, expanded memory and display technology, Colligan said.