Treo Troubles Trigger Palm Plunge

Even an industry standard needs the occasional refresh, and revised sales expectations have shaken investor confidence

Has Palm (PALM) lost its touch? Its Treo handset is one of the best-selling smart phones of all time, setting the gold standard for ease of use. But on Sept. 7, a day after Palm pre-announced (ahead of official release later this month) that its first-quarter Treo handset sales would fall substantially short of expectations, Wall Street investors ran for the exits, sending the company's shares 8% lower, to $14.30.

Certainly a slew of new competitors are enough to give investors jitters. Rival Research in Motion (RIM) just introduced its new device, the BlackBerry Pearl (see, 8/23/06, "Keeping BlackBerry Juiced"), a sleek handset aimed at grabbing many of the well-heeled consumers who make up the Treo's base. And in the first month following its June 1 debut, Motorola (MOT) sold 150,000 of its superslim Q e-mail gadgets.


  The competition has now caused Palm, which had engineered a remarkable turnaround in recent years, to disappoint twice in just more than two months. Back on June 29, the company said its revenues for the quarter would come in between $380 million and $385 million, short of analysts' expectations. Then, in the most recent announcement, Palm said it wouldn't be able to make even its own prior guidance, saying it expects revenues of $354 to $356 million for the quarter ended Sept. 1.

But don't count out Palm just yet. While far smaller than rivals such as Motorola and Nokia (NOK), Palm may know the smart phone business better than anyone else. Handspring, eventually purchased by Palm, unveiled the original Treo 600 in the fall of 2003, and the successor Treo 650 still sells well after debuting in 2004.

Indeed, Palm's biggest problem has been its own success. It has grabbed all the major wireless carriers in the U.S. and is moving to expand its reach overseas. And it has become software-agnostic, offering devices on both the Palm and Microsoft operating systems, as well as BlackBerry Connect and Good Technology e-mail services.


  Still, the Treo's design hasn't substantially changed since it was introduced three years ago—close to an eternity in the fad-driven cell-phone business.

Analysts correctly predicted Palm would quickly lose market share as consumers flocked to slimmer designs like the Q and Motorola's hit Razr phone over the bulky Treo. "The big question around the Treo is when will it get a design refresh?" says analyst Cliff Raskind at Strategy Analytics.

Palm Chief Executive Officer Ed Colligan is promising the wait won't be long. "We will soon address the market dynamics responsible for our first-quarter revenue shortfall with two major new product launches, one that improves our pricing position and both which extend our carrier relationships throughout the global markets," Colligan said in a statement.


  Will the new products be enough, though? Numerous Web sites have shown pictures of a new Treo 750 using the Windows operating system that appears to merely do away with the vestigial antenna, but which retains the same overall Treo shape. It initially will be sold by Vodafone (VOD) in Europe, but likely will become available this fall to customers of Cingular Wireless, the joint venture between AT&T (T) and BellSouth (BLS).

A second device, however, is expected to sell for a lower price point and could be the most substantial redesign in years, notes Merrill Lynch (MER) analyst Vivek Arya. In a report released before Palm's pre-announcement, the Merrill analyst suggests Palm's stock could see substantial upside on the new devices. "While competition is increasing, we believe Palm's stock…well discounts the risks," Arya said.


  Other analysts were not so sure, and Palm faced a number of downgrades after its pre-announcement.

The company still anticipates when it officially reports earnings on Sept. 21 that its per-share profit will meet its expectations, coming in at 13 cents to 14 cents a share. Excluding one-time items, the company continues to project a profit at 18 cents to 19 cents a share. Wall Street analysts had been expecting a profit of 19 cents a share on revenue of $383 million, according to Thomson First Call.

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