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Palm Optimistic About Long Term, Signals Rough Patch in the Short Term

Wed Dec 19, 2007 - 9:57 AM EST - By Dieter Bohn


As warned two weeks ago, Palm's financial results for Q2 of financial year 2008 are a serious disappointment. Although Smartphone sell-though was up 11% year over year, that was the only bright point. Quarterly revenue was $349.6 million, significantly less than Palm had hoped to make. Overall the company is not doing as well as hoped, however they do not appear to be in dire financial straits and should be able to continue on despite slimmer margins going forward.

CEO Ed Colligan started the call with the clear intent to provide a reckoning for Palm's results. He did not mince words:

Q2 did not meet our expectations. We did not execute as well as we need to. [...] the biggest issue [was] the delivery of the 755p. [...] As you know, we have experienced quality issues on legacy products that have affected customer satisfaction and driven up warranty costs.

Here and later, during the question and answer period, Colligan made no excuses for the poor quality control issues on certain Treo lines - which after delays to ROM updates was a welcome sign. Colligan also expanded a bit, during the Q and A, on why the Treo 755p on Verizon was delayed. The issue, it seems, is that the PalmOS has some difficulty under Verizon's "standard benchmark tests" and so requires more testing than is normally expected for a smartphone. Colligan stressed that the PalmOS still performs well for the end user and is still fast on Verizon's EVDO network. However, it was another sign that the PalmOS is in sore need of an update and quickly.

That update, however, is likely not to arrive until the end of 2008. That's the expected 'gold master' date for the OS to be finished, the first devices running it are expected in early 2009. While Palm, of course, couldn't name exact dates for anything, they did re-confirm these estimates during the call.

Financially speaking, Palm expects things to continue to be a little shaky, primarily due to slim margins on the (more popular than expected) Centro and parts shortages in the next quarter. More ominously, Palm also said that after this quarter they will no longer be providing earnings estimates. In essence, Colligan seemed to be signaling that Palm is going to have a pretty rough year. Although they do have some good devices on both Windows Mobile and PalmOS coming down the pike, the real excitement and innovation looks to be a full year away. In the meantime, buzzwords like "rethinking our OpEx" and "rightsize many of our activities" and "lower our break-even point" seemed to indicate that Palm is planning on some short term pain in order to achieve long term gain.

With regard to that long term gain, Colligan seems very optimistic. The design chops of Jon Rubenstein have become critically important to Palm's success and his input into Palm's design team looks to help Palm's eventual turnaround. Colligan on Palm's continuing efforts to effect a 'transformation' of the company:

We are not done, but we have made substantial progress. Some of that progress is in business processes you cannot see, but some of it is in products you can buy today. [...] We intend to lead on design, ease of use, and functionality. [...] We recognize we need to build a larger array of offerings and retake the mantle of design and innovation leadership, and that work is underway.

Colligan revisited the issue of design innovation during the Q and A discussion, here he addresses whether or not their evolutionary design improvement strategy for the Treo is the right move going forward:

We're done with adjustments. That's not happening anymore. The products we're working on are all breakthrough form factors and designs. In certain areas where there's an existing product line we'll extend that design center. But we're working on breakthrough designs, breakthrough user experience, breakthrough UI and other functionality on next generation systems. We're not stopping at anything short of revolutionary and fantastic design on at least our next generation platform products.

So while we'll still see evolutionary improvements on Treos and Centros in the coming year, the real breakthroughs are promised with the next version of the PalmOS. The good news: Colligan did mention (but came short of promising) WiFi and GPS as opportunities for short term evolutionary improvements to the Treo line. We assume that means the 800w should be arriving soon.

In short, it looks very much like 2008 will be a lot like 2007 for Palm: a few new devices that fill some needs, but the revolution won't happen quite yet. We hope (and believe) that Palm should be able to fulfill their promise to do better on quality control, to release products on a timely schedule, and to give us the "benchmark indicators" that they're making progress on the next-gen PalmOS. Here's to hoping that we are able to see details of that OS as soon as possible -- and that it's competitive with the iPhone and with Google's Android platform. If it's not, we worry that even 2009 will look like 2007: a rocky road for Palm.

For more on TreoCentral's expectations for what Palm will do in 2008, stay tuned for Jennifer Chappell's article reviewing 2007 and rounding up the rumors for 2008 (including some not yet made public!) . Should be up later this week. :-)

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