Palm Inc. almost looks like two companies these days, depending on which way the light strikes.
Palm is focused on keeping the productivity-based Treo line from slipping into irrelevance, while it experiments with form factors and features for a future in the consumer market.
This past/future dichotomy is reflected in two relatively new devices. The Treo 755p is all business and sells for $300 at Verizon Wireless; the device’s late appearance this month was partly blamed for sluggish revenue in Palm’s quarter ended Nov. 30. And the Centro sells at Sprint Nextel Corp. for $100 as a consumer-oriented smartphone, which is selling briskly but whose trajectory may be somewhat constrained by component shortages until February.
Revolutionary designs
The two devices reflect a company with one foot in the past, but focused on the future.
Meanwhile, CEO Ed Colligan said recently that the company is cutting costs, narrowing its list of projects and working on a new, Linux-based operating system and product platform for innovative products.
“We’re not stopping short of revolutionary designs,” Colligan said in a Dec. 18 conference call with analysts.
Colligan appeared to indicate that the Treo line was due for an overhaul – Palm is “done with adjustments” to existing products, he said – while also stating that wholly new products based on the new OS would be out in 2008. New products will span the pricing gamut from Centro’s $100 price point to “premium pricing” for deserving devices. Forthcoming features will include Wi-Fi, GPS, expanded memory capacity and new display technology, the CEO said.
Thus Palm is a company transforming itself on-the-fly. It seeks to maintain its perch in margin-rich, high-tier smartphones for its traditional business customer base while blazing a path in the affordable smartphone category for consumers. Familiar Treos may soon be a thing of the past, while Centro’s design doesn’t necessarily predict form factors to come.
Carrier relationships
Meanwhile, Palm’s relations with network operators in the United States maintain its bread-and-butter retail channel.
“Palm is a very important vendor to us and the Treo is an important device,” said Brenda Rainey, spokeswoman at Verizon. “We have customers who are loyal to that device, to the Palm OS and to Palm devices running [Microsoft Corp.’s] Windows Mobile on Verizon’s network, especially for their PIM and email features.”
The Treo 755p basically refreshes the 700p, runs an updated Palm OS and does away with the external antenna. The device runs on Verizon Wireless’ CDMA2000 1x EV-DO network.
Some sense of the new thinking at Palm is reflected in the Centro device, which analyst Tero Kuittinen at Avian Securities L.L.C., writing on TheStreet.com dubbed “almost kooky.” Kuittinen meant that as a compliment, as he is one of several analysts giving Palm the benefit of the doubt on its turnaround efforts. And he thinks the size, shape and feature set on the Centro may well presage good news for the company.
The Centro has been well received at Sprint Nextel, which could use a handset hit as well.
“Sprint sees the Centro as a market-expanding device,” said Danny Bowman, VP for customer equipment at the carrier, in an email response to questions. “[It] is primarily designed for a younger demographic looking to upgrade from a traditional feature phone.”
The target market is young customers who are avid text messagers, game players and Web surfers, Bowman said, and who may be ready for their first smartphone.
“Sprint and Palm have a strong working relationship and we expect that to continue,” Bowman added.
Moving forward
Tavis McCourt, analyst at Morgan Keegan, is another optimist on Palm’s fortunes. McCourt said Palm is poised to show “substantial financial improvement” after the upcoming, February quarter ends. And Palm “has long-term opportunities, if its execution improves.”
To foster those long-term fortunes, Palm is “radically lowering its cost structure to lower its breakeven point,” McCourt said.
The company’s revenue trend after February should improve because constraints on component suppliers for the Centro should be resolved and continuing Centro sales should be strong, McCourt said. After February, an exclusive Centro run at Sprint Nextel ends and the device will move to other U.S. carrier portfolios and overseas markets, according to the analyst.
McCourt said that while Palm anticipated strong sales for the Centro, demand had outstripped the company’s initially conservative projections. A lack of excess inventory among component suppliers means that Palm is racing to meet demand.
Treo overhang
If Palm’s refresh of its Treo line is “half decent,” McCourt said that will stabilize the company’s Treo-based revenue. But, the analyst said, legacy Treo models may weigh on the company’s growth potential by distracting from the vendor’s newest models.
Despite these caveats, McCourt said the company has time to make good on its plans.
“Keep in mind,” McCourt said, “that although Palm has lost market share, it is shipping more handsets this year than last year.”
As long as Palm maintains its SKUs at the top-tier carriers (Palm has products at three of four top-tier carriers) “all you need” is a homerun product, the analyst said. And McCourt is bullish on Centro’s significance.
“We may look back on this quarter and see that $100 smartphones made these devices a mass-market item,” the analyst said. “All of a sudden, the price point comes down and young consumers like the QWERTY keypad for text messaging. Consumers are trading up from their feature phones.”
