A Little Less Sweaty at Palm

Extra financial cushion, new more-capable models, and some nifty deals are helping to steady the handheld king's hand

In May, it looked like Palm Chief Executive Carl Yankowski was starting to lose his grip on the handheld-computer market. Sales were tanking, inventories were rocketing, and the red ink was flowing. Lofty expectations for triple-digit growth suddenly seemed unachievable as Palm's (PALM ) dwindling cash reserves presented the possibility of the company going from market leader to also-ran.

Turns out, reports of Palm's demise were greatly exaggerated. To quell investor worries, the company announced it had secured a $150 million "emergency" credit line to see it through the tough times. And despite the supply-chain management blunders that led to its troubles, Palm boosted its retail market share in recent months, thanks to a no-holds-barred price war and the popularity of its new mid-priced m500 and m505 personal digital assistants (PDAs).

Even more impressive, execs slashed a three-month inventory backlog down to less than 10 weeks in just a few weeks with better product-tracking techniques. Plus, the Santa Clara (Calif.) company is aiming to kick-start sales further in the next few weeks with its new, low-end m125 consumer model, before introducing a high-end, integrated-wireless offering for corporate types called the m700 later this year. "We're getting leaner and more nimble," says Chief Financial Officer Judy Bruner.


  And not a moment too soon. The hotly contested handheld market is becoming increasingly crowded with new entrants -- at the very time consumer demand seems to be cooling. Research firm Dataquest reported earlier in August that global shipments of handheld computers plummeted 21% from the first quarter to the second. That's despite bargain-basement prices on some of the most sought-after models.

No doubt, Palm has taken a hit. Excluding charges, in July it reported a fourth-quarter 2001 loss of $89.2 million, or 16 cents a share, on revenue of $165.3 million. In the year-ago quarter, it reported earnings of $17.2 million, or 3 cents per share, on revenue of more than $350 million. Bruner says the company expects an operating loss of $60 million to $80 million on revenue of $200 million to $220 million in the current quarter.

A survey of analysts by Thomson Financial predicts Palm will report a loss of about $45 million, or 8 cents a share, for the current quarter, on revenues of $209 million. That compares with a gain of $23.9 million, or 4 cents a share, in the year-ago period. For the fiscal year ending May, 2002, analysts expect Palm to report a loss of 10 cents a share.

The problem, analysts say, is that rather than just looking for a simple device to keep track of addresses and calendar dates, new buyers are looking for sleek gizmos that do everything from collecting and alerting them to e-mails to handling voice communications. "A lot of people who want simple PDA functionality [already] have them," explains U.S. Bancorp Piper Jaffray analyst William Crawford.


  Palm's recent moves reflect the new reality. Going forward, its products will include an expansion slot based on so-called secure digital memory technology. The size of a stamp, the memory cards can store large amounts of data, or be used to transform an electronic organizer into a digital music player, camera, and more.

By 2002, the technology is expected to hold up to half a gigabyte of data that can be shared among devices such as Palms, camcorders, and even notebook computers. Palm and electronics maker Panasonic jointly plan a massive print and television campaign for the retail shopping season to highlight the capabilities of these slots.

Palm has even greater ambitions for the corporate market. Yankowski is launching an all-out assault to win contracts in the business sector, where the company can make bulk sales of its more expensive models. "We haven't been as aggressive as we need to be in terms of marketing," Yankowski admitted on Aug. 8 at a tech conference in Boston.

The company already had forged key distribution and corporate software development partnerships with SAP and PricewaterhouseCoopers, but it followed up on Aug. 16 by announcing the acquisition of technology assets and key engineering talent from operating system developer Be (BEOS ) for $11 million in stock. With Be, Palm hopes to add glitzy audio and video features to future operating-system releases. It also is collaborating with other software companies to easily set up corporate systems that exchange data such as e-mail, instant messages, and files between company servers and Palms.


  Still, Palm's continued dominance is no sure thing. The company's wireless m700 is likely to face stiff competition from new handhelds expected this fall from Compaq Computer (CPQ ), Hewlett-Packard (HWP ), and others, based on a coming update to Microsoft's Pocket PC operating system.

And at rival Handspring (HAND ), Chief Executive Donna Dubinsky says her company is focusing its efforts on the wireless market. Meanwhile, mobile-phone makers like Nokia (NOK ) and Ericsson (ERICY ) are working to marry handheld functionality with their devices. The stiff competition and uncertainty about Palm's prospects are reflected in its stock price. Shares have plummeted 96%, from a high of $95.06 a share on March 1, 2000, the first day of trading, to just $3.69.

Palm execs say they now have the focus they lacked -- as well as key corporate partners to help where they're weakest. The company will need to deliver attractive new products and software on time and within budget in the next year. For now, Palm remains the handheld king, with 80% of the operating-system market and about 70% of the device market. Whether it will keep the crown is a question that could take months more to answer.

By Cliff Edwards in Santa Clara, Calif.

Edited by Beth Belton

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