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December 20, 2006

Wall Street balks as Palm posts 95% profit slip

Investors sent shares of Palm Inc to a new 52-week low on the Nasdaq, following the company's announcement of a 95% drop in quarterly profit.

By CBR Staff Writer

Still, the Treo smart phone maker did beat out investor expectations, and its share price recovered modestly from its $13.41 bottom to close at $13.58 yesterday.

However, the Sunnyvale, California-based Palm is facing an increasing number of smart phone rivals and its current quarterly projections missed analysts’ targets.

Part of the problem is the US delay of a new Treo, which saw Palm lower its targets last month to earnings per share of between 10 cents and 11 cents on revenue from $390m to $395m. Previously, it had forecast 15 cents to 18 cents on revenue of $430m to $450m.

For its most recent, fiscal second quarter, Palm earned $12.8m, or 12 cents per share, compared to $260.9m, or $2.51 in the year-ago quarter that included a whopping $226.3m tax gain.

Revenue fell for the first time in more than three years — or almost 12% to $392.9m from $444.6m last year.

Excluding items, Palm would have earned $17.6m, or 17 cents per share. This beat analysts’ expectations of 15 cents a share on revenue of $392.3m, according to Thomson Financial.

Chief executive Ed Colligan said, on a conference call, that the company had no excuses for not delivering its Treo 750 to the market on time. The company had previously said some carriers faced certification issues with the device – something outside of Palm’s control – which caused some of the delays.

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We have to do better and we have to hit those dates, Colligan said.

The Treo 750 is expected to boost Palm’s US sales and Colligan said it would launch in the country during the current quarter. However, the company has certainly missed the holiday shopping period.

Delays of this kind are indeed costly to Palm which this year saw Motorola, Nokia and Samsung Electronics enter the smart phone market. This forced Palm to broaden its portfolio, and the company launched a lower-cost, more mainstream model, the Treo 680, to compete against Motorola’s Q among others.

The strategy seemed to pay off, with Palm reaching record high unit shipments in the most recent quarter, up 42% year-over-year to 617,000 units, said the company. The Windows Mobile-based Treo 750 launched in Europe in September.

However, some financial analysts yesterday warned of the rough competitive landscape that Palm now traverses.

While Palm could see positive impact from refreshed product line-up and its international efforts, we are maintaining our ‘underperform’ rating owing to intensifying competitive environment where cost of competing is increasing, wrote Bear Stearns research Andrew Neff, in a research note.

Colligan said Palm was accelerating some development of new products and investing some more in others to put us in a stronger competitive position existing the year.

But not soon enough for Wall Street. For the current quarter, Palm forecast revenue of between $400m and $410m, with earnings ranging from 8 cents and 10 cents a share. Excluding items, Palm expects to earn between 11 cents and 13 cents. This wasn’t even close to what analysts were hoping for: revenue of $416.6m and earnings of 16 cents, excluding items.

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